easy · Quantitative Finance derivatives

A 1-year European call option with strike K = 50 costs $5, while the corresponding put costs $3. The current stock price is $50 and the risk-free rate is 5% continuously compounded.

Based on put-call parity, what is the arbitrage-free relationship?

  1. The stock price must rise to satisfy parity.
  2. The put is relatively expensive compared to the call.
  3. The call is relatively expensive compared to the put.
  4. The market is in equilibrium with no arbitrage.

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