Thomas Duckworth Owns and Operates Stones Asset Management

question 92

Multiple Choice

Thomas Duckworth owns and operates Stones Asset Management.The firm manages $10 billion in assets and focuses on exploiting arbitrage opportunities.Duckworth uses put - call parity to price put and call options.According to his put - call parity analysis Duckworth realizes that puts with a strike price of $30 and 1 month remaining until expiration on Medusa's Inc.should be priced at $2.30.However he realizes that the $30 puts are trading for $2.75 in the open market.How should Duckworth exploit this arbitrage opportunity?

• A) sell the puts in the open market, buy Medusa's stock, short a zero coupon bond with a face value of $30 and maturity of 1 month, and buy a 1 month call with a strike price of $30
• B) buy the puts in the open market, short Medusa's stock, short a zero coupon bond with a face value of $30 and maturity of 1 month, and buy a 1 month call with a strike price of $30
• C) sell the puts in the open market, lend $30 at the risk free rate, buy a 1 month $30 call on Medusa's, and short the underlying stock.
• D) buy a zero coupon bond with a face value of $30 and maturity of 1 month and buy a 1 month call with a strike price of $30

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Definitions:

Disposable Income

The sum of money families can use for expenditures and savings once income taxes are deducted.

Necessities

Fundamental needs required for sustaining human life, such as food, water, shelter, and clothing.

Economic Activity

Any action that involves the production, distribution, and consumption of goods and services at all levels within a society.

Declining

A phase in the product life cycle where sales and profits begin to decrease as the product loses market interest or becomes obsolete.