You are given: (i) An investor short-sells a nondividend-paying stock that has a current price of 44

Question:

You are given:

(i) An investor short-sells a nondividend-paying stock that has a current price of 44 per share.

(ii) This investor also writes a collar on this stock consisting of a 40-strike European put option and a 50-strike European call option. Both options expire in one year.

(iii) The prices of the options on this stock are:

Strike Price Call option Put option 8.42 2.47 3.86 7.42 40 50

(iv) The continuously compounded risk-free interest rate is 5%.

(v) Assume there are no transaction costs.

Calculate the maximum profit for the overall position at expiration.

(A) 2.61

(B) 3.37

(D) 5.21

(E) 7.39

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:11 AM

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You are given: (i) An investor short-sells a nondividend-paying stock that has a current price of 44

Question:

Strike Price Call option Put option 8.42 2.47 3.86 7.42 40 50

Step by Step Answer:

C The written collar consists of a short 40strike put and a long 50strike call The i...View the full answer

Derivative Pricing

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