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DO NOT COPY AND PASTE ANY ANSWER FROM OTHER CHEGG POSTS Please show all work...

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Finance

DO NOT COPY AND PASTE ANY ANSWER FROM OTHER CHEGG POSTS

Please show all work so I can learn. Thanks!

_____________________________________

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?

________________________________________________

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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