Be specific about the strategy you need to implement.

Your friend George Costanza tells you that he can borrow money for one year at the current T-Bill rate + 2.00%, “an unbeatable rate” he says. You are not impressed and tell George that you can do better than that: you can borrow money for one year at the T-Bill rate itself! “No way” says George, “no bank would lend you money that cheap”. You reply “George, my friend, you disappoint me. I don’t need a bank to lend me the money. I simply need European put and European call stock options in addition to the stock they are written on “ With the help of a payoff table and arbitrage arguments show George that you are not blowing smoke (i.e., that you can indeed borrow money at the risk-free rate if you are able to take long and short positions in the assets you mentioned above: stock and options.). Be specific about the strategy you need to implement. Since no numbers are provided, your demonstration will have to be done “with symbols”.

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