Consider the put-call parity for European Call and Put options on the same same stock S, same expiry date T, same strike price E
C + Ee^(−rT) = P + S
where r is the risk-free rate. Assume that the put-call parity is violated, i.e.
C = P + S − Ee^(−rT) + A, A > 0
where A is some positive constant.
Demonstrate that there is arbitrage.
Specify which asset to buy, sell, or short-cell and how to setup a portfolio which will generate arbitrage.