Understanding Risk-Free Profit and Arbitrage

The video tutorial explains how a $5 risk-free profit can be achieved through a combination of buying a call option, a bond, and shorting a stock while writing a put option. It examines different scenarios for stock prices at expiration, including when the stock price drops to zero and when it rises to seventy. The video concludes by noting that such arbitrage opportunities are rare due to the ability of computer programs to quickly exploit them.

What is the initial claim made about the $5 profit?

• It is a risk-free profit.

• It is a high-risk investment.

• It is a guaranteed loss.

• It is a break-even scenario.

In the scenario where the stock price drops to zero, what happens to the call option?

• It remains unchanged.

• It becomes highly valuable.

• It doubles in value.

• It becomes worthless.

When the stock price is zero, what must be done to cover the short position?

• Buy the stock at market price.

• Pay a penalty fee.

• Nothing, as the stock is worthless.

• Sell additional stocks.

What is the outcome for the put option when the stock price is zero?

• It is sold to another investor.

• It becomes a call option.

• It is exercised, requiring a $35 payment.

• It is not exercised.

In the scenario where the stock price rises to $70, what is the value of the call option?

• $0

• $105

• $35

• $70

What happens to the put option when the stock price is $70?

• It becomes worthless.

• It is exercised.

• It increases in value.

• It is converted to a call option.

How much does it cost to cover the short position when the stock price is $70?

• $0

• $105

• $70

• $35

What is the general outcome regardless of the stock price at expiration?

• The investment is lost.

• A loss is incurred.

• The profit increases exponentially.

• All obligations are covered, and the $5 profit is retained.

Why are such arbitrage opportunities rare?

• They are illegal.

• They require insider information.

• Computer programs quickly exploit them.

• They are only available to large investors.

What role do computer programs play in arbitrage opportunities?

• They quickly identify and exploit opportunities.

• They create new opportunities.

• They have no impact on arbitrage.

• They prevent any opportunities from existing.