Suppose you can buy or sell European puts and calls on the common stock of XYZ Corporation,

Question:

Suppose you can buy or sell European puts and calls on the of XYZ Corporation, which has a current share price of $30, has a rate of return of standard deviation of .3, and pays no dividends. The exercise price on six-month puts and calls is $35, and the risk-free rate is 1% per year. You believe the stock price will rise and wish to create a synthetic forward contract position for delivery of 100 shares six months hence.
(a) How do you construct the synthetic futures position? How much must you borrow or lend?
(b) What is your expected profit if you believe the share price will be $42 six months from now?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...