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

question 5

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 want to construct a riskless arbitrage to exploit the mispriced puts, you should ________.

• A) buy the call and sell the put
• B) write the call and buy the put
• C) write the call and buy the put and buy the stock and borrow the present value of the exercise price
• D) buy the call and buy the put and short the stock and lend the present value of the exercise price

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Definitions:

Non-Controlling Interest (NCI)

The portion of equity in a subsidiary not owned by the parent company, representing minority shareholders' interest.

Full Fair Value

An approach within certain valuation and accounting frameworks where assets and liabilities are recorded at their full market value.

Proportionate Consolidation Method

An accounting method where an investing entity records its share of the assets, liabilities, income, and expenses of an associate or joint venture.

Assets and Liabilities

Assets are resources owned by a company expected to provide future benefits, and liabilities are obligations a company owes to outside parties.