hard · Principles of Finance risk-return-portfolio
A stock is currently trading at S_0 = 50. A six-month European call option with a strike price of K = 50 trades for 5.00. A six-month European put option with the same strike trades for 4.20. The risk-free rate is 2% continuously compounded.
Based on Put-Call Parity, which of the following is true?
- An arbitrageur should sell the stock and buy the call.
- The options are correctly priced.
- The call is relatively underpriced.
- The call is relatively overpriced.
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