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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Business

Leila Mckenzie

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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Katie Mccarty · Answer 1

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%