Suppose You Use Put-Call Parity to Compute a European Call

question 41

Multiple Choice

Suppose you use put-call parity to compute a European call price from the European put price,the stock price,and the risk-free rate.You find the market price of the call to be less than the price given by put-call parity.Ignoring transaction costs,what trades should you do?

• A)buy the call and the risk-free bonds and sell the put and the stock
• B)buy the stock and the risk-free bonds and sell the put and the call
• C)buy the put and the stock and sell the risk-free bonds and the call
• D)buy the put and the call and sell the risk-free bonds and the stock
• E)none of the above

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Definitions:

Resold

The act of selling a product or asset that has previously been purchased.

Third-Degree Price Discrimination

Third-degree price discrimination occurs when a seller charges different prices to different consumer groups for the same product or service, based on varying demand elasticities.

Monopolist

A single seller in a market who has significant control over the price and supply of a particular good or service, often due to the absence of viable competition.

Individual Buys

Transactions where an individual acquires goods or services for personal use, often analyzed in the context of consumer behavior and market demand.