Question
6. The stock of the Triangular File Company is trading at $90 per share. A one-year call option written on Triangular File, with a strike
6. The stock of the Triangular File Company is trading at $90 per share. A one-year call option written on Triangular File, with a strike price of $100, is trading at $8. The interest rate is 10% per year.
(a) Suppose that European put options on Triangular File are not available. How can you construct a one-year put option with a strike price of $100? Use a cash flow table to support your argument by demonstrating that the payoffs from your portfolio at any time and in any state of the world look like those from the put option you are trying to construct.
(b) Now suppose European one-year put options with strike price of $100 are traded. What is their no-arbitrage price?
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