Question
Kate wishes to buy a European put option on ABC, Inc., a non-dividend-paying common stock, with a strike price of $60 and six months until
Kate wishes to buy a European put option on ABC, Inc., a non-dividend-paying common stock, with a strike price of $60 and six months until expiration. ABCs common stock is currently selling for $50 per share, and Tom expects that the stock price will either rise to $80 or fall to $35 in six months. The risk-free rate over the next six months is 2.47% (over next one year is 5%). How do you create a replicating portfolio with identical payoffs to the put option just described?
Group of answer choices
Short .56 of a share of stock and lend $43.37
Buy .56 of a share of stock and borrow $43.37
Short 1.80 of a share of stock and lend $43.37
Buy 1.80 of a share of stock and borrow $44.44
Short .56 of a share of stock and lend $44.44
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