Suppose you buy a stock (which pays no dividends) for $65 and buy a $60-strike p

Question

Suppose you buy a stock (which pays no dividends) for $65 and buy a $60-strike put for $4.36. Assuming the effective annual interest rate is 7%, what is the profit on your position if the stock is worth $72.80 when the option expires?

$3.44

$–1.42

$0.00

$–14.22

$–1.22

$3.44

Suppose you buy a stock (which pays no dividends) for $65 and buy a $60-strike put for $4.36. Assuming the effective annual interest rate is 7%, what is the profit on your position if the stock is worth $72.80 when the option expires?

Selected Answer: e.

$3.44

Answers: a.

$–1.42

b.

$0.00

c.

$–14.22

d.

$–1.22

e.

$3.44

Explanation / Answer

we assume that we dont have money, we have to borrow.

so if we buy stock worth $65 today and we also buy put option by paying a premium of $4.36,

total investment required today = $65 + $4.36 = $69.36

so we will borrow $69.36 @7%

we have to pay with interest amount = $69.36*(1+0.07) = $74.22

now on expiry, the price of stock is $72.80,

so we will sell stock at $72.80 but put option will be worthless

so net profit = $72.80 - $74.22 = -1.42 answer

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.