2. Warwick plc's current stock price is £2.04. European call and European put options, both with one year to maturity and the same strike price of £2.00 are trading at £0.18 and £0.11 respectively. Warwick plc is not expected to pay a dividend over the next year. The annualised continuously compounded risk-free rate is 4% per annum. Which of the following strategies would realise an arbitrage profit? * Go long the European call option, short the European put option, long the stock and borrow at the risk-free rate. Go long the European call option, short the European put option, short the stock and lend at the risk-free rate. Go short the European call option, long the European put option, long the stock and borrow at the risk-free

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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2. Warwick plc's current stock price is £2.04. European call and European put options, both with
one year to maturity and the same strike price of £2.00 are trading at £0.18 and £0.11
respectively. Warwick plc is not expected to pay a dividend over the next year. The annualised
continuously compounded risk-free rate is 4% per annum.
Which of the following strategies would realise an arbitrage profit?
*
Go long the European call option, short the European put option, long the stock and borrow at the risk-free
rate.
Go long the European call option, short the European put option, short the stock and lend at the risk-free
rate.
Go short the European call option, long the European put option, long the stock and borrow at the risk-free
rate.
Go short the European call option, long the European put option, short the stock and lend at the risk-free
rate.
There is no
arbitrage.
Transcribed Image Text:2. Warwick plc's current stock price is £2.04. European call and European put options, both with one year to maturity and the same strike price of £2.00 are trading at £0.18 and £0.11 respectively. Warwick plc is not expected to pay a dividend over the next year. The annualised continuously compounded risk-free rate is 4% per annum. Which of the following strategies would realise an arbitrage profit? * Go long the European call option, short the European put option, long the stock and borrow at the risk-free rate. Go long the European call option, short the European put option, short the stock and lend at the risk-free rate. Go short the European call option, long the European put option, long the stock and borrow at the risk-free rate. Go short the European call option, long the European put option, short the stock and lend at the risk-free rate. There is no arbitrage.
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