A share of stock has both put and call options outstanding based on it. The current stock price is $70. The call and put options both have 40 days to expiration and exercise prices of $65. The risk free rate is 4%. The call option is currently priced at $6.40 and the put option is priced at $2.40. The stock does not pay dividends.
1. What steps would you take today to take advantage of this arbitrage opportunity?
a) Buy the call option, sell the put option, short the stock, and invest $64.72 at the risk-free rate.
b) Sell the call option, buy the put option, short the stock, and invest $64.72 at the risk-free rate.
c) Buy the call option, sell the put option, buy the stock, and borrow $64.72 at the risk-free rate.
d) Sell the call option, buy the put option, short the stock, and borrow $64.72 at the risk-free rate.
2. What amount of arbitrage profit would be earned?