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The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms:

The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms:

Essentials Of Investments
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
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10. The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) 21.50 5.50 4.50 Stock XLT Call option on Stock XLT Put option on Stock XLT Exercise price ($) 21.00 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 mar- ket price data provided. Chapter 20: An Introduction to Derivative Markets and Securities 779 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 assum- ing 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 $23 at expiration three months from now?
Transcribed Image Text:10. The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) 21.50 5.50 4.50 Stock XLT Call option on Stock XLT Put option on Stock XLT Exercise price ($) 21.00 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 mar- ket price data provided. Chapter 20: An Introduction to Derivative Markets and Securities 779 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 assum- ing 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?
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