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

question 7

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 construct a riskless arbitrage to exploit the mispriced puts your arbitrage profit will be

• A) $5.75
• B) $6.17
• C) $0.96
• D) $0.43

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Definitions:

Chief Management Accountant

A senior financial executive responsible for managing the accounting activities within an organization to support strategic decision-making.

Controller

The chief management accountant of a division or other segment of a business.

Conversion Cost

The total expense incurred to convert raw materials into finished goods, including labor and overhead costs.

Direct Labor Cost

Expenses related to employees who directly manufacture products or provide services, forming part of the cost of goods sold.