Options EOC #2C - Arbitrage

[apuity]

Hi Guys,

I am a bit confused around Question 2C in the Derivatives-Options reading. I am not confused about calculations, but rather around the purpose of the question.

[question removed by moderator]

I did all the calculations right. It shows that the person will LOSE $200 by longing the call and shorting the stock. But why would anybody engage in this arbitrage transaction that earns less than the risk-free rate?

Thanks in advance…

A.

[oz001]

@apuity

I did all the calculations right. It shows that the person will LOSE $200 by longing the call and shorting the stock. But why would anybody engage in this arbitrage transaction that earns less than the risk-free rate?

So they can short the loan i.e. borrow at < risk free rate and invest at the risk free rate to earn arbitrage profit