INVESTMENTS-CONNECT PLUS ACCESS
INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Chapter 20, Problem 24PS

a.

Summary Introduction

To compute: The payoff of the portfolio in the given conditions.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

b.

Summary Introduction

To compute: The risk-free interest rate of the portfolio, the condition in which stock pays no dividends.

Introduction:

Risk-free interest rate: When an investment is made in securities that do not have any risk of any financial losses in a termed period, the rate at which the return is earned is termed as a risk-free interest rate.

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You buy a share of stock, write a 1-year call option with X= $95, and buy a 1-year put option with X= $95. Your net outlay to establish the entire portfolio is $94. The stock pays no dividends. a. What is the payoff of your portfolio? Payoff b. What must be the risk-free interest rate? (Round your answer to 2 decimal places.) Risk-free rate
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