medium · Quantitative Finance derivatives
A stock currently trades at 60. A six-month European call struck at 58 trades at 5.50, while the corresponding put trades at 2.00. The continuously compounded risk-free rate is 4%.
Based on Put-Call Parity, what arbitrage trade should be executed?
- Sell the call and the put simultaneously (Short Straddle).
- No arbitrage is possible because the market is in equilibrium.
- Sell the call, buy the put, and buy the stock.
- Buy the call, sell the put, and sell the stock.
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