Question: Given: C = $5.00, P = $2.50, S = $42, K = $40, T = 6 months, r = 5% p.a. a. What would you

Given: C = $5.00, P = $2.50, S = $42, K = $40, T = 6 months, r = 5% p.a.

a. What would you do to exploit these quotes? (List the transactions.) What would be your riskless arbitrage profit?

b. How could you synthetically short-sell stock using only options on the stock and borrowing or lending at the risk-free rate? Would you be better off actually short-selling the stock, or synthetically short-selling it using options?

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