10 points) Company XYZ has been trading in a narrow price range for the past month, and

you are convinced it is going to break far out of that range in the next year. You do not know

whether it will go up or down, however. The current price of the stock is $50 per share. The

price of a 1-year call option at an exercise price of $60 is $2. The price of a 1-year put option

at an exercise price of $60 is $1.1.

(a) (3 points) What would be a simple option strategy (using a call and a put option) to exploit

your conviction about the stock prices future movements? What is the cost of this strategy?

(b) (3 points) How far would the stock price have to move in either direction for you to

make a profit on your initial investment?

(c) (4 points) What's the risk-free rate based on the put-call parity? Assuming that the company has

no previous record of paying dividends and is not expected to pay dividends in the future.