Question
An investor puts together the following portfolio: The investor deposits $1000 into a 1-year CD that pays i = 2.1%. The investor writes a put
An investor puts together the following portfolio:
The investor deposits $1000 into a 1-year CD that pays i = 2.1%.
The investor writes a put option on TomCo stock, agreeing to sell 100 shares at the price of $100 for each share in 1 year if the buyer exercises the option.
The investor collects $30 for the put option. Use the 1-year CD interest rate of i = 2.1% to determine future value.
Analysts model the spot price S of TomCo stock in 1 year with PDF
fS(s) =1/100 (s 90) 90 s < 100
1/100 (110 s) 100 s 110
What is the probability the investor makes a profit from this portfolio after 1 year?
Step by Step Solution
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Step: 1
To determine the probability that the investor makes a profit from this portfolio after 1 year we need to analyze the potential outcomes for the portf...
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Fundamentals of Futures and Options Markets
Authors: John C. Hull
8th edition
978-1292155036, 1292155035, 132993341, 978-0132993340
