Question: Consider the following portfolio: (i) one sold (written) European put option; (ii) one bought (held) European call option; (iii) one short-sold unit of stock (the

Consider the following portfolio:
(i) one sold (written) European put option;
(ii) one bought (held) European call option;
(iii) one short-sold unit of stock (the same stock that both the put and call options are written over);
(iv) one loan (for which the portfolio is the lender) for $105.
At time t, S = $110, X = $110, c (call option price) = $15, p ( put option price) = $10. R(t,T) = 1.1

a) If at time T, S = $120 calculate the net outcome (value) of the portfolio.

b) Assume now at T that S = $100. Calculate the net outcome (value) of the portfolio at T.

c) What observation can be made about the put-call parity relationship?

Step by Step Solution

★★★★★

3.45 Rating (155 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

ANSWER a If at time T S 120 then the net outcome of the portfolio will be 5 This is because the call ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

Consider the following portfolio of corporate bonds. All bonds pay interest semi-annually on a 30/360 days basis: Required: (a) Calculate the price for each bond and the market value of each bond....

Consider the following portfolio of European options on the euro: A short position in a call with strike price USD1.3/EUR and a long position in a put with the same strike price and same time to...

5. Consider the following portfolio of European options: Long two July 90 strike calls at $13 (*It means that we buy two calls with a strike, 90. Also, their maturity is July and the price of the two...

Consider the following portfolio. You write a put option with exercise price 90 and buy a put option on the same stock with the same expiration date with exercise price 95. a. Plot the value of the...

We consider the following portfolio optimization problem: where C is the empirical covariance matrix, A > 0 is a risk parameter and r is the time-average return for each asset for the given period....

Consider the following table showing one year's total sales (revenue) and profits for eight large retailers in the United States. a. Construct a scatterplot for the data. b. Briefly characterize the...

Consider the following figures. Assume that one number from 1 to 7 is equally likely to be selected at random. Each number corresponds to one of the seven figures shown. Determine the probability of...

Tidwell Company experienced the following during 2013: a. Sold preferred stock for $480,000. b. Declared dividends of $150,000 payable on March 1, 2014. c. Borrowed $575,000 from bank on a 2-year...

Tidwell Company experienced the following during 2011: a. Sold preferred stock for $480,000. b. Declared dividends of $150,000 payable on March 1, 2012. c. Borrowed $575,000 from bank on a two-year...

The set is an orthonormal set of vectors in C[-Ï, Ï] with inner product defined by (2). (a) Use trigonometric identities to write the function sin4 x as a linear combination of elements of...

The Basel II standards for banking specify procedures for estimating the exposure to risk. In particular, Basel II specifies how much cash banks must keep on hand to cover bad loans. One element of...

After years of R&D investment, Bailey Brands (BB), a small Detroit company, is now able to produce concentrated mango juice more efficiently and effectively than any of its competitors. The advantage...

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 2 5 - year mortgage for 7 5 percent of the $ 4 2 0 0 , 0 0 0 purchase price. The monthly payment on this loan...

What are some of the issues faced by the global market researcher while using a survey?

What are the main features of market capitalism and centrally planned socialism? What has led to the adoption of a market capitalist system among many former socialist countries?

The Canliss Milling Company purchased machinery on January 2, 2019, for $930,000. A five-year life was estimated and no residual value was anticipated. Canliss decided to use the straight-line...

Ti(a) transforms toTi(3) at 882C (1155 K), with heat of transformation equal to 830 cal/mole (3,473 J/mol). Calculate the heat of reaction when Ti(3) is oxidized by pure oxygen gas to form TiO^ at...

According to the college registrar's office, 40% of students enrolled in an introductory statistics class this semester are freshmen, 25% are sophomores, 15% are juniors, and 20% are seniors. You...

Question One day, Polly went missing, only to be discovered across the country months later, having assumed a new identity. When she is found, she goes by a new name and has no memory for her...

Exercise 4 (A 1-step 3-state model). Consider a 1-step 3-state model, where there are three possi- ble time evolution w1,W2,W3 and a stock with current price So = 100 and time-l price Swi) = 120,...

(4) Exercise 4 (A 1-step 3-state model). Consider a 1-step 3-state model, where there are three possi- ble time evolution w1,W2,63 and a stock with current price So = 100 and time 1 price Sw]) = 120,...

4. Exercise Consider a l-step binomial model, where there are two possible time evolution H, T and a stock with current price So = 100 and time-l price S (H) = 120, S (T) = 90. Assume one-time...

7. PORTFOLIO RISK Consider the following two assets: X and Y The returns on these two assets depend on the movement of the price of gold. Define State 1 as the price of gold increases and State 2 as...

answer all 1S. The bond immunization strategy for a single liability is to: duration of the bond portfolio with the time horizon of the liability maturity of the bond portfolio with the time horizon...

solve both for like 6. Consider the following portfolio. You write a put option with exercise price 90 and buy a put option on the same stock with the same expiration with exercise price 95. a. Plot...