A Stock Priced at $65 Has a Standard Deviation of 30

question 14

Multiple Choice

A stock priced at $65 has a standard deviation of 30%. Three month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27 and the puts cost $1.10. The risk free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued.
-If you wished to construct a riskless arbitrage to exploit the mispriced puts you should ____________.

• A) buy the call and sell the put
• B) write the call and buy the put
• C) write the call and buy the put and buy the stock and borrow the present value of the exercise price
• D) buy the call and buy the put and short the stock and lend the present value of the exercise price

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Definitions:

Abnormal

Deviating from what is considered normal or typical, often in reference to behavior or physical conditions.

Danger To Self

A situation or state in which an individual poses a significant risk of harm to their own health, life, or well-being.

Abnormal Functioning

Patterns of behaviors, thoughts, or emotions considered to deviate significantly from societal norms or expectations, often causing distress or disability.

Eccentric

Describing behavior or a person that deviates from the norm in a peculiar or whimsical way.