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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started