2nd

The current price of stock Y is $50. The annually compounded risk free rate is 7%.

A three-month call option on stock Y, with an exercise (strike) price of $50 is trading at $1.57.

1. What is a fair price for a three-month put option on stock Y?
2. Explain how you would create a three-month risk-free borrowing (you are the borrower) with the help of options?
3. What is the effective annual rate on the borrowing that you have created in part B?
4. Explain how you would create a short position in a share of stock Y with the help of options?
5. If the stock price in three months is $55 then what will be the profit or loss on the position that you created in part D? specify whether is a profit or a loss.

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