Problem 5

You buy a call option and sell a put option on shares of ABC stock. Both options are European, have an exercise price of $70, expire in 90 days, and are priced at $4.50. You also invest the present value of the exercise price, at an interest rate (annualized) of 10%.

a. Draw the payoff diagram for your portfolio (on the expiration date). Remember to include the payoffs to the call and put as well as the investment proceeds.

b. [Challenging question] What is the current stock price? Why?

From update - If you are asking about part (a), I learn it requires we plot different stock prices on the X-axis and the payoff corresponding to these prices on the Y-axis. If you are asking about part (b), that will follow from part (a).