A trader shorts one share of a stock index for $50 and buys a European call option
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Question:
A trader shorts one share of a stock index for $50 and buys a European call option with strike price $60 on that stock index that expires in 2 years for $10.
Assume the annual risk-free continuously compounded interest rate is 3% and use continuous compounding of interest in all your calculations for this problem.
Assume that the continuously compounded interest rate you earn onthe short sale proceeds, theshort rebate rate, is equal to the risk-free rate.
The stock index increases to $75 after 2 years.
Calculate the profiton your combined position.
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