Profits from Abritrage Strategy

[jensen]

If they give u these:

Put price, p
Call Price, c
Risk free rate
Current Stock price
Strike price
time

and asks u to identify the arbitrage strategy in order to take advantage of the situation (put-call parity), hence work out the profit per share from the said strategy, do u:

A) work out true price of the mis-priced option, say the put, then minus the original price to give u the profit.

OR

B) Work out the initial cash flow from the strategy, invest the proceeds, then minus the strike price from the accumulated funds ?

I've tried both ways and my concern is that both methods give a slighty different answer from each other. Is this true?

Thanks.

[Abraham Weishaus]

There are many different ways to arbitrage. An exam question would have to be specific.

See sample question 2 from the ones they released to see how an exam question would go.