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You buy a share of stock, write a 1-year call option with X = $75, and...

You buy a share of stock, write a 1-year call option with X = $75, and buy a 1-year put option with X = $75. Your net outlay to establish the entire portfolio is $73.8. The stock pays no dividends.

a. What is the payoff of your portfolio?

Payoff ?

b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.)

Risk - free rate ?%

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Answer #1

As per put call parity,

call premium + risk free investment = stock price + put premium

(Note that for above equation to hold, strike price of call option and strike price of put option must be same and Risk free invesmtment must be equal to present value of strike price of call and put options)

Since in above position, stock and put option are bought and call option is sold; the position is equivalent to risk free investmnet.

Therefore payoff of portfolio will be future value of risk free asset which is equal to $75

(a) $75

(b) Riskfree interest rate = Future value / Present Value - 1 = $75 /$73.8 - 1 = 1.626% p.a.

Thumbs up please if satisfied. Thanks :)

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