a) Put options on Chicken King with a strike price of $42.50 and 2 months to maturity are properly priced to sell for $3.68 (no bid-ask spread). Call options with the same strike and maturity are selling for $0.88. If the current price of Chicken King's stock is $39.75 and the risk-free rate is 4% p.a., explain how you can profit from the situation without taking on any net risk to yourself.
b) Compare the costs and benefits of building a collar strategy to hedge a short risk exposure vs. just buying a call option. What factors would influence your choice between the two strategies?
c) Why aren't most options exercised before expiration, even when they are in the money?