Same information as above: Suppose you are allowed to trade the following financial instruments (assume...
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Finance
Same information as above:
Suppose you are allowed to trade the following financial instruments (assume that each option contract covers one share of stock A, e.g., a call option allows you to buy one share of A at the strike price if you want):
[1] Stock A which is traded at $80 now [2] The 1-year to maturity European call option on stock A with a strike price of $60; [3] The 1-year to maturity European put option on stock A with a strike price of $60; [4] The 1-year to maturity European call option on stock A with a strike price of $80; [5] The 1-year to maturity European put option on stock A with a strike price of $80; [6] The 1-year to maturity European call option on stock A with a strike price of $100; [7] The 1-year to maturity European put option on stock A with a strike price of $100; [8] The 1-year zero-coupon bond with a YTM of 5%;
Suppose the call option [6] has a premium of $16, the put option [7] has a permium of $12. Is there any arbitrage opportunity and if so, how should you trade?
Group of answer choices
Yes, short [1] and [7], buy [6] and [8].
None of the other answers is correct.
Yes, buy [1] and [5], short [4] and [8].
No arbitrage.
Yes, short [1] and [8], buy [6] and [7].
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