You buy a share of stock, write a one-year call option with a strike price X = $

Question

You buy a share of stock, write a one-year call option with a strike price X = $18, and buy a one-year put option with a strike price X = $18. Your net initial cost to establish the entire portfolio is $17.50. What must be the risk-free interest rate from now until the options maturity date? The stock pays no dividends. (Do not round intermediate calculations. Enter your answer as a percentage rounded to two decimal places.)

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You buy a share of stock, write a one-year call option with a strike price X = $18, and buy a one-year put option with a strike price X = $18. Your net initial cost to establish the entire portfolio is $17.50. What must be the risk-free interest rate from now until the options maturity date? The stock pays no dividends. (Do not round intermediate calculations. Enter your answer as a percentage rounded to two decimal places.)

Explanation / Answer

Risk free rate of interest = (Strike price- Initial cost )/ initial cost

Risk free rate of interest = (18-17.5)/ 17.5

                                        = .5/17.5

                                        = 2.86%

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