The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) Exercise Price ($) Stock XLT $ 21.50 $ - Call Option on Stock XLT $ 5.50 $ 21.00 Put Option on Stock XLT $ 4.50 $ 21.00 Both of these options will expire 91 days from now, and the annualized yield for the 91-day Treasury bill is 3.0 percent. a. Briefly explain how to construct a synthetic Treasury bill position. b. Calculate the annualized yield for the synthetic Treasury bill in part (a) using the market price data provided. c. Describe the arbitrage strategy implied by the difference in yields for the actual and synthetic T-bill positions. Show the net, riskless cash flow you could generate assuming a transaction involving 21 actual T-bills and 100 synthetic T-bills. d. What is the net cash flow of this arbitrage strategy at the option expiration date, assuming that Stock XLT trades at $23 at expiration three months from now?
The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) Exercise Price ($) Stock XLT $ 21.50 $ - Call Option on Stock XLT $ 5.50 $ 21.00 Put Option on Stock XLT $ 4.50 $ 21.00 Both of these options will expire 91 days from now, and the annualized yield for the 91-day Treasury bill is 3.0 percent. a. Briefly explain how to construct a synthetic Treasury bill position. b. Calculate the annualized yield for the synthetic Treasury bill in part (a) using the market price data provided. c. Describe the arbitrage strategy implied by the difference in yields for the actual and synthetic T-bill positions. Show the net, riskless cash flow you could generate assuming a transaction involving 21 actual T-bills and 100 synthetic T-bills. d. What is the net cash flow of this arbitrage strategy at the option expiration date, assuming that Stock XLT trades at $23 at expiration three months from now?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: |
Price ($) | Exercise Price ($) | |
Stock XLT | $ 21.50 | $ - |
Call Option on Stock XLT | $ 5.50 | $ 21.00 |
Put Option on Stock XLT | $ 4.50 | $ 21.00 |
Both of these options will expire 91 days from now, and the annualized yield for the 91-day Treasury bill is 3.0 percent. |
a. Briefly explain how to construct a synthetic Treasury bill position. |
b. Calculate the annualized yield for the synthetic Treasury bill in part (a) using the market price data provided. |
c. Describe the arbitrage strategy implied by the difference in yields for the actual and synthetic T-bill positions. Show the net, riskless cash flow you could generate assuming a transaction involving 21 actual T-bills and 100 synthetic T-bills. |
d. What is the net cash flow of this arbitrage strategy at the option expiration date, assuming that Stock XLT trades at $23 at expiration three months from now? |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education