You buy a share of stock, write a one-year call option with X = $20, and buy a o

Question

You buy a share of stock, write a one-year call option with X = $20, and buy a one-year put option with X = $20. Your net outlay to establish the entire portfolio is $18.60. What must be the risk-free interest rate? The stock pays no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

You buy a share of stock, write a one-year call option with X = $20, and buy a one-year put option with X = $20. Your net outlay to establish the entire portfolio is $18.60. What must be the risk-free interest rate? The stock pays no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

As per Call-Put parity equation :

C0-P0=S0-X/(1+Rf)

Here , C0 = Call option Price, P0 = Put option Price , X= Strike Price , Rf = risk free rate

Here , C0-P0 - S0 = -18.60

=> X/(1+Rf) = 18.60

=> 20/(1+Rf) = 18.60

=> Rf = 7.52%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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