Ninzatols Case Ninzatols’ stock is currently priced at $35, while a European-sty
ID: 2806415 • Letter: N
Question
Ninzatols Case
Ninzatols’ stock is currently priced at $35, while a European-style put option with a strike price of $36 is trading at $4.31 and a European-style call option with the same strike price is trading at $4.15. Both options have 6 months remaining until expiration. The risk-free rate is currently 4 percent.
Ninzatol Case: In the case of the options on Ninzatols’ stock, by establishing a long protective put position, one could:
not earn an arbitrage profit because he should short the protective put position.
earn an arbitrage profit of $0.14 per share when simultaneously selling the call and borrowing the remaining funds needed for the position at the risk-free rate.
earn an arbitrage profit of $0.48 per share when simultaneously purchasing the call and borrowing the remaining funds needed for the position at the risk-free rate.
earn an arbitrage profit of $0.14 per share when simultaneously selling the call and lending at the risk-free rate.
not earn an arbitrage profit because he should short the protective put position.
B.earn an arbitrage profit of $0.14 per share when simultaneously selling the call and borrowing the remaining funds needed for the position at the risk-free rate.
C.earn an arbitrage profit of $0.48 per share when simultaneously purchasing the call and borrowing the remaining funds needed for the position at the risk-free rate.
D.earn an arbitrage profit of $0.14 per share when simultaneously selling the call and lending at the risk-free rate.
Explanation / Answer
Solution:
Ninzatol Case: In the case of the options on Ninzatols’ stock, by establishing a long protective put position, one could:
Right Option is B) earn an arbitrage profit of $0.14 per share when simultaneously selling the call and borrowing the remaining funds needed for the position at the risk-free rate.
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