Fin 3144: Investments
Quiz 7
Name:
KEY
1. You buy a share of stock, write a 1year call option with X = $10, and buy a 1year 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 riskfree 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+PC
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+PC = $12 +$0  $2 = $10.
c.
X = 10, S = 15.
S+PC = $10.
d.
PV(X) = S+PC.
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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 '08
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 Exercise Price

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