Consider ABY corp stock. ABY corp stock does not pay a dividend. The risk-free rate is 7%. The market’s expected return is 10% and its standard deviation is 15%. The stock trades at $50, it has β = 0.7, and the standard deviation of the stock’s return is 25%. There is a call option on the stock expiring in 1 year at strike 100, which costs $40, and a put option at 110, which costs $80. What is the highest Sharpe ratio that you can achieve, by trading (i.e. taking arbitrary large long and short positions in) the stock, the market, and the call and put options, and what strategy do you use to achieve it?

Answer rating: 100% (QA)

An important principle in options pricing is called putcall parity This parity states that the value of a call option at a specified strike price impl... View the full answer