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20 November, 10:04

You buy a share of stock, write a one-year call option with X = $10, and buy a one-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. What is the payoff of your portfolio? What must be the risk-free interest rate? The stock pays no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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  1. 20 November, 12:37
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    The payoff of your portfolio shows a risk-less with time-T and stock value equal to $10.

    The risk-free interest rate must be 5.26%

    Explanation:

    position Sr10

    buy stock Sr Sr

    short call 0 - (Sr - 10)

    long call 10 - Sr 0

    total 10 10

    Therefore, The payoff of your portfolio shows a risk-less with time-T and stock value equal to $10.

    risk - free interest rate = [[strike price/expected value]/net cost] - 1

    = [10/9.5] - 1

    = 5.26%

    Therefore, The risk-free interest rate must be 5.26%
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