Consider the Following Information About a Three-Month Option on Stock

question 10

Multiple Choice

Consider the following information about a three-month option on stock XYZ:

Using the information above,calculate the arbitrage profit:

• A) $0
• B) $0.75
• C) $1.45
• D) $4.19

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Definitions:

Present Value Factors

Mathematical factors used in calculating the present value of future cash flows, considering the time value of money.

Cash Outlay

The actual amount of cash spent by a business on expenses, such as purchasing assets, repaying debts, or covering operational costs.

Desired Rate

Often refers to the target or preferred rate of return on investment or progress in a specific area, such as growth or interest.

Present Value Factor

A numerical figure used to calculate the present value of a future amount of money or stream of cash flows given a specified rate of return.