Question

You buy a share of stock, write a one-year call option with a strike price X = $14, and buy a one-year put option with a strike price X = $14. Your net initial cost to establish the entire portfolio is $13.50. What must be the risk-free interest rate from now until the options maturity date? The stock pays no dividends.

Answer 1

3.70%

Step-by-step explanation:

Data provided in the question:

Call strike price X = $14

Market value after 1 year = $14

Net initial cost = 13.50$

Now,

Risk Free Rate = [ ( Market value - Initial cost ) ÷ Initial cost ] × 100%

or

Risk Free Rate = [ ( $14 - $13.50 ) ÷ $13.50 ] × 100%

or

Risk Free Rate = [ $0.50 ÷ $13.50 ] × 100%

or

Risk Free Rate = [ 0.037 ] × 100%

or

Risk Free Rate = 3.70%