USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 95

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent.

-Refer to Exhibit 14.6. How could an investor create arbitrage profits?

• A) sell the stock short, write a put, buy a call, and invest the proceeds at the risk-free rate
• B) buy the stock, write a put, buy a call, and invest the proceeds at the risk-free rate
• C) sell the stock short, buy a put, write a call, and invest the proceeds at the risk-free rate
• D) buy the stock, write a put, buy a call, and borrow the strike price at the risk-free rate
• E) sell the stock short, write a put, buy a call, and borrow the strike price at the risk-free rate.

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Definitions:

Lawsuit

A legal case where a party seeks to enforce or defend a legal right through a court process.

Assignment

The transfer of rights, duties, or interests under a contract from one party to another.

Donee Beneficiary

A third party who benefits from a contract wherein the promisor agrees to give a gift or confer a benefit directly to the donee beneficiary.

Promisee

The individual or party to whom a promise or commitment is made within the context of a contract.