I'm having trouble with working out a question that I can't currently ask my lecturer as they're away. Hoping for some help here with why the answer is (a).
A stock price is currently \$40. It is known that at the end of two months it will be either \$36 or \$44. The riskfree interest rate is 6% p.a. with continuous compounding. If a two-month call option on the stock with strike \$42 is trading at \$1.20, how can you make a riskless profit?
- a) Long 1 stock and short 4 call options
- b) Short 1 stock and long 4 call options
- c) Long 1 stock and short 1 call option
- d) Short 1 stock and long 2 call options