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2009-Quiz 7

# 2009-Quiz 7 - Fin 3144 Investments Quiz 7 Name KEY 1 You...

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Fin 3144: Investments Quiz 7 Name: KEY 1. You buy a share of stock, write a 1-year call option with X = \$10, and buy a 1-year put option with X = \$10, both on the same stock. Your net outlay to establish the entire portfolio is \$9.00. The stock pays no dividends. a. What is the risk-free interest rate? b. What will be the value of your portfolio upon expiration if the stock price is \$12? c. What will be the value of your portfolio upon expiration if the stock price is \$15? d. Comment on the answers you obtain for (b) and (c). e. How can you synthetically construct a share of stock from a call, a put, and a bond? -----------------------------------------------------------------------------------------------------

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Key a. C+PV(X) = S+P Call + Present Value of the exercise price = Stock + Put PV(X) = S+P-C You are given that the cost of a share of stock, cost of a put, minus the cost of an option is = \$9.00. PV(X) = \$9.00 X/(1+rf) = 9.00 X=10 Rf = 11.11% b. X=10, S=12. What is the value of the put? \$0 What is the value of the call? \$2 Total = S+P-C = \$12 +\$0 - \$2 = \$10. c. X = 10, S = 15. S+P-C = \$10. d. PV(X) = S+P-C. Upon maturity, PV(X) just becomes X. So irrespective of the stock price, you will always get X, which is \$10.
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2009-Quiz 7 - Fin 3144 Investments Quiz 7 Name KEY 1 You...

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