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You buy a share of stock, write a one-year call option with X = $15, and...

You buy a share of stock, write a one-year call option with X = $15, and buy a one-year put option with X = $15. Your net outlay to establish the entire portfolio is $14.50. What must be the risk-free interest rate? What is the payoff? The stock pays no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Answer #1

As per put call parity,

Cash investment + call premium = stock price + put premium

{Note that strike of call and put option should be same and cash investment should be present value of strike of call or put}

Strike / (1+Risk free rate) = Stock -call premium + put premium

15 / (1+Risk free rate) = 14.50

1 + Risk free rate = 15 / 14.5

Risk free rate = 3.4483%

Therefore Payoff from above position will be = 14.50 x (1+3.4483%) = $15 {Strike Price}

Thumbs up please if satisfied. Thanks :)

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