Answer Happy

ABC common stock trades at a market price of $100. There are traded European and American put and call options on ABC common stock with times to expiration of 1 year and exercise prices ranging from $80 to $120 in steps of $10. The risk free rate is 5% continuously compounded. Consider the following statements. Statement l. If the market price of a European put option on ABC common stock with an exercise price of $110 is lower than its lower bound, a riskless arbitrage would involve buying the option, short-selling the stock and investing $104.64 in the risk free asset. Statement II. Using the put-call parity relationship, a long position in the risk free asset with a face value of $100 and a time to maturity of 1 year can be created by buying ABC common stock, buying a European put on the stock and writing a European call on the stock with exercise prices of $100 and times to expiration of 1 year. Which of the following is correct? O a. Statements I and II are incorrect. Ob. Statement I is incorrect, Statement Il is correct. O c. Statements I and Il are correct. O d. Statement I is correct, Statement Il is incorrect.