You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $$107$ at year$-$end. XYZ currently sells for $$107.$ Over the next year, the stock price will increase by $10\%$ or decrease by $10\%.$ The T$-$bill rate is $5\%.$ Unfortunately, no put options are traded on XYZ Company.

What portfolio position in stock and T$-$bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X $=107?$ Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.

S$=96\mathrm{.}3$; S$=117\mathrm{.}7$

Buy $0\mathrm{.}5$ shares:

Invest in T$-$bills:

Total:

$(6$ total answers$)$