There Are Three- and Six-Month European Calls On $A B C$

question 15

Multiple Choice

There are three- and six-month European calls on $A B C$ stock. Suppose the three-month option costs $5 and the six-month option costs $3. Then, there is an arbitrage strategy that involves, among other things,

• A) Buying the three-month call and selling the six-month call.
• B) Buying the six-month call and selling the three-month call.
• C) Buying the three-month and six-month calls, shorting the stock, and investing.
• D) There is not enough information given to answer this question.

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Definitions:

Contribution Margin

The difference between sales revenue and variable costs, representing the portion of sales that contributes to covering fixed costs.

Production Constraint

A limit to the amount or volume of production, often caused by the availability of resources, technology, or market demand.

Machine Hours

A measure of the amount of time a machine is operated in the production process.

Avoidable Costs

Avoidable Costs are expenses that can be eliminated if a particular decision is made, such as discontinuing a product or service.