You buy a share of stock, write a 1-year call option with X= $65, and buy a 1-year put option with X= $65. Your net outlay to establish the entire portfolio is $64.2. The stock pays no dividends. a. What is the payoff of your portfolio? Payoff $ 65 b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.) Risk-free rate 1.25 %
You buy a share of stock, write a 1-year call option with X= $65, and buy a 1-year put option with X= $65. Your net outlay to establish the entire portfolio is $64.2. The stock pays no dividends. a. What is the payoff of your portfolio? Payoff $ 65 b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.) Risk-free rate 1.25 %
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
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Would like an explanation of the correct steps for this 2-part problem, I'm unsure of the final answers I found (shown below).
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Transcribed Image Text:You buy a share of stock, write a 1-year call option with X = $65, and buy a 1-year put option with X = $65. Your net outlay to establish the entire portfolio is $64.2. The stock pays no dividends.
**a. What is the payoff of your portfolio?**
- **Payoff:** $65
**b. What must be the risk-free interest rate?** *(Round your answer to 2 decimal places.)*
- **Risk-free rate:** 1.25%
This setup explores creating a portfolio involving stock, put, and call options, and it calculates the payoff and the risk-free interest rate based on a given net outlay.
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