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Question 6 Assume no transaction costs. A stock has a price of $17 on 1/1/2006. Vicki sells 1,000 shares of stock short with an expiration
Question 6 Assume no transaction costs. A stock has a price of $17 on 1/1/2006. Vicki sells 1,000 shares of stock short with an expiration date of 1/1/2007. Valerie buys 1,000 put options expiring 1/1/2007 with a strike price of $17. These options cost S1.25. The stock closes at S15 on 1/1/2007 and both Vickie and Valerie make money. What is the difference between their gains? Assume a continuous discount rate of 5% annually, and assume that Valerie is allowed to invest the proceeds of the short sale at this risk-free rate
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