Understanding Options and Arbitrage

The video tutorial explains the concept of put-call parity using stock XYZ, call and put options, and a risk-free bond. It demonstrates how to identify arbitrage opportunities by comparing the combined value of stock and put options with call options and bonds. The tutorial outlines a strategy to profit from price discrepancies by shorting the stock and writing a put option, while buying the call option and bond, resulting in a risk-free profit.

What is the trading price of the call option on stock XYZ with a $35 strike price?

• $31

• $12

• $35

• $8

How much can you buy the risk-free bond for right now?

• $31

• $12

• $30

• $35

What is the value of the risk-free bond at option expiration?

• $31

• $30

• $35

• $8

According to put-call parity, what should be equal at expiration?

• Stock plus call

• Stock plus put

• Call plus bond

• Put plus bond

What is the total trading price of the stock plus put combination?

• $35

• $43

• $38

• $31

What is the total trading price of the call plus bond combination?

• $35

• $31

• $38

• $43

What is the arbitrage opportunity in this scenario?

• Selling the bond and buying the stock

• Buying the stock and selling the bond

• Buying the call and selling the put

• Selling the stock plus put and buying the call plus bond

What does shorting the stock mean?

• Buying the stock

• Selling the stock

• Holding the stock

• Writing a call option

How much profit can be made from the arbitrage opportunity?

• $5

• $8

• $3

• $12

What happens to the profit if the stock price changes in the future?

• It increases

• It decreases

• It is lost

• It remains the same