1. Put options in the common stock of Apex Builders, Inc. have a strike price of $110, expire in exactly 1 year, and currently sell for $2. Call options of Apex with the same strike price and expiration date sell for $18. Apex’s common stock currently sells for $115 and does not pay a dividend. The 1 year risk-free rate is 10%.
Which of the following strategies would result in a risk-free arbitrage profit?
a. Buy the put, buy the stock, sell the call, borrow the present value as a strike price
b. Buy the call, lend the present value of the strike price, sell the put, sell the stock short
c. Buy the put, sell the stock short, sell the call, lend the present value of the stock price
d. Buy the call, borrow the present value of the strike price, sell the put, buy the stock
2. You have shorted ABC Stock at $50 per share. What kind of options contract would best protect this position in case stocks rise?