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

question 35

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 construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be ________.

• A) $5.75
• B) $6.17
• C) $0.96
• D) $0.42

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