1. XYZ stock is currently trading at $100. The one-year effective interest rate is 5% ($1 lent today yields $05 one year from now). A one year call with strike price $105 is priced at $5.
2. Suppose you buy one call for $5, short one share for $100, and lend $100. Graph the PROFIT function (y axis, profit, x axis stock price) for this position. Be sure to label the points, if any, where the graph intercepts the x-axis or y-axis.
3. What common derivative is the combination of investments (call share + loan) equivalent to? In the absence of arbitrage, what should be the price of this derivative if it were available?