In the arbitrage scenario where S+P = 55 and B+C = 54, what is the correct strategy?
Explanation
Sell High (55), Buy Low (54).
Other questions
According to the Put-Call Parity equation, which portfolio is equivalent to a Fiduciary Call?
What represents 'B' in the mnemonic 'Sip Pepsi = Be Cool' (S + P = B + C)?
Which of the following correctly describes a 'Protective Put'?
If you want to create a Synthetic Call option, which positions should you take?
The Put-Call Parity relationship applies strictly to which type of options?
Using the Put-Call Parity, what is the formula for a Synthetic Put?
In a synthetic position, what does a negative sign (-) typically indicate?
Calculate the price of a European Call option if: Stock = 100, Put = 5, PV of Strike (Bond) = 90.
Calculate the price of the underlying Stock if: Call = 12, Put = 7, PV of Strike = 50.
What constitutes a 'Fiduciary Call'?
In Put-Call Forward Parity, the spot price (S) is replaced by which expression?
If a firm is considered insolvent (Value of Assets < Debt), what is the payoff to shareholders?
Viewed as an option, a firm's equity is equivalent to:
What represents the 'Strike Price' in the analogy where Equity is a Call Option on the firm?
If risk-free rates (RFR) increase, what is the impact on the value of a Call Option based on the parity logic shown?
Calculate the value of a Bond (PV of Strike) in a parity arbitrage scenario if: Stock = 50, Put = 3, Call = 8.
A Synthetic Long Bond is created by:
If the market price of a Call is 10, but the synthetic call (S + P - B) is calculated at 12, what arbitrage action should be taken?
In the Put-Call Forward Parity equation, if the Forward Price is F, what is the formula for the Synthetic Call?
What is the payoff to debtholders if a firm is insolvent (Value of Assets < Debt)?
Calculate the PV of the Strike Price (Bond) if Strike = 105, RFR = 5 percent, and time to maturity = 1 year.
If Stock = 80, Strike = 80, RFR = 10 percent, Time = 1 year, and Call = 10, what is the Put price? (Assume X=80 is face value).
A portfolio of Long Stock + Long Put is used to limit downside risk. This is known as:
Identify the incorrect rearrangement of the Put-Call Parity formula (S + P = B + C).
If a Put option is priced at 5, Stock is 50, PV of Strike is 48, and Call is priced at 6, does an arbitrage opportunity exist?
A 'Synthetic Stock' position is constructed by:
If the Spot Price (S) is 100 and the Risk-Free Rate is 5 percent (T=1), what is the Forward Price (F) used in parity?
In the Merton corporate bond model, the value of the firm's debt is equal to:
If a Call is 10, Put is 10, and PV of Strike is 100, what must the Stock price be for parity to hold?
Which component in Put-Call Parity accounts for the time value of money related to the strike price?
The equation 'Stock + Put = Bond + Call' implies that:
Using Put-Call Forward Parity, if F = 105, X = 105, RFR = 5 percent (T=1), and C = 5, what is the value of P?
If Risk-Free Rate increases, what happens to the price of a Put option (holding other factors constant)?
Which position allows an investor to borrow money at the risk-free rate synthetically?
Calculate C if S=50, P=2, X=50, RFR=0 percent (T=1).
In the firm value analogy, if a company has Assets of 100 and Debt of 80, the 'option' is:
If implied volatility increases, what generally happens to both Call and Put prices?
To create a 'Synthetic Short Put', what positions are required?
Which condition allows for the substitution of S with PV(F) in parity equations?
If the equation S + P = B + C is violated, what is the immediate implication?
Calculate the Synthetic Call price if Forward Price = 105, Strike = 100, RFR = 5 percent (T=1), Put = 3.
What is the primary reason American options might not fit the 'Sip Pepsi = Be Cool' formula exactly?
For a solvent firm, the value of Debt (D) plus the value of Equity (E) equals:
When rearranging the formula to S = B + C - P, what does the term 'B' represent in an investment context?
Which strategy mimics owning the stock using derivatives?
If Spot = 100, Call = 5, Put = 5, and Strike = 100, what is the implied Risk-Free Rate?
The combination of a Long Call and a Short Put with the same strike and maturity creates a position similar to:
Put-Call Parity is effectively an application of:
If a firm is solvent, shareholders receive: