Consider a European call option for a non-dividend paying stock currently priced at S(0) with strike price K at maturity T. If the price of the call C(0) at time t = 0 is greater than the stock's price S(0), then which of the following trading strategies, if any, produces an arbitrage opportunity?

Essentials Of Investments
11th Edition
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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Consider a European call option for a non-dividend paying stock currently
priced at S(0) with strike price K at maturity T.
If the price of the call C(0) at time t = 0 is greater than the stock's price
S(0), then which of the following trading strategies, if any, produces an
arbitrage opportunity?
Select one option.
Short sell a call option and use the funds to buy the stock. Invest the
O remaining cash at the risk-free rate.
O Buy a call option by borrowing cash at the risk-free rate.
O Short sell a call option. Invest the funds at the risk-free rate.
O No arbitrage opportunities exist.
Transcribed Image Text:Consider a European call option for a non-dividend paying stock currently priced at S(0) with strike price K at maturity T. If the price of the call C(0) at time t = 0 is greater than the stock's price S(0), then which of the following trading strategies, if any, produces an arbitrage opportunity? Select one option. Short sell a call option and use the funds to buy the stock. Invest the O remaining cash at the risk-free rate. O Buy a call option by borrowing cash at the risk-free rate. O Short sell a call option. Invest the funds at the risk-free rate. O No arbitrage opportunities exist.
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