Question: eBook Problem 14-08 As an option trader, you are constantly looking for opportunities to make an arbitrage transaction (i.e., a trade in which you do

eBook

Problem 14-08

As an option trader, you are constantly looking for opportunities to make an arbitrage transaction (i.e., a trade in which you do not need to commit your own capital or take any risk but can still make a profit). Suppose you observe the following prices for options on DRKC Co. stock: $3.14 for a call with an exercise price of $62, and $3.44 for a put with an exercise price of $62. Both options expire in exactly six months, and the price of a six-month T-bill is $95.00 (for face value of $100).

Using the put-call-spot parity condition, choose the correct graph of synthetically recreate the payoff structure of a share of DRKC stock in six months using a combination of puts, calls, and T-bills transacted today.

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