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You are given that:
i) An 1-year European 50-strike put costs 7
ii) An 1-year European 55-strike put costs 12
iii) The annual effective risk-free interest rate is 5%
Which of the following strategy can take advantage of the arbitrage opportunity?
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A) Short-selling a 55-strike put, buying 50-strike put, borrowing cash
B) Short-selling a 55-strike put, short-selling 50-strike put, borrowing cash
C) Short-selling a 55-strike put, buying 50-strike put, lending cash
D) Buying a 55-strike put, buying 50-strike put, borrowing cash
E) No arbitrage opportunity exists
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