The current price of a Superstar share is $50. The annual interest rate is 5%. T

Question

The current price of a Superstar share is $50. The annual interest rate is 5%. The current price of a put option on 100 Superstar shares with maturity one year from now and a strike price of $45 is $100. You enter a long futures position on 100 Superstar shares. You also buy a call option on 100 Superstar shares with a strike price of $45. Both contracts have maturities one year from now.

What is the rate of return on your derivative contracts if the spot price of a Superstar share one year from now is $53? Answer: 4.39%

Explanation / Answer

A lot of missing information.

assumed strike price of future is $ 50 in the absence of information.

Assumed cost of 100 Share call option is $100 in the absence of information.

Two Contracts: Call option: Future contract: Total income Premium                 100 Strike price                   50 Gain on exercising call option = 100*(53-45) = 800 Gain on exercising Future contract = 100*(53-50) = 300 Cost of premium 100 Less: Margin amount (Assumed) 100.00 Interest cost on premium 5 Interest cost on premium 5 Net profit 695 Net profit 195                 890 Cost                 200 Rate of return 22.47%

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