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Basic Question 2 of 8
Continue with question 1. Assume a stock price is $55 and that in the next year it will either rise by 20% or fall by 16%. The risk-free interest rate is 5%. A call option on this stock has an exercise price of $60. What would you hold to form a risk-free portfolio if the call option is selling for $3.33?
II. Buy 1000 shares of this stock and sell 303 call options.
III. Sell 1000 call options and buy 303 shares.
IV. Buy 1000 call options and sell 303 shares.
I. Sell 1000 shares of this stock and buy 303 call options.
II. Buy 1000 shares of this stock and sell 303 call options.
III. Sell 1000 call options and buy 303 shares.
IV. Buy 1000 call options and sell 303 shares.
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | II: EMF |
| mazen1967 | note that the price of the optin is exactly c0 so we may either buy or sell the option and take the opposite regarding the asset |
| tim2 | Seems to me none of them are risk free. Take III for example sell 1000 calls, buy 303 shares. Selling the calls get you 3.33*1000= $3,330 Buying the shares costs 303*55 = $16,665 If the share go to zero, the calls are worthless and you are out of pocket 3,300-16,665 = $13,335 Not risk free! Where am I going wrong? |
| hocj | Calculations are based on assumptions that price will either rise by 20% or fall by 16%. |
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Learning Outcome Statements
explain how to value a derivative using a one-period binomial model
CFA® 2024 Level I Curriculum, Volume 5, Module 10.