An investor buys a call at a price of $6.10 with an exercise price of $56. At wh

Question

An investor buys a call at a price of $6.10 with an exercise price of $56. At what stock price will the 11. investor break even on the purchase of the call? (Round your answer to 2 decimal places.) Break even price $ fi An investor purchases a stock for $39 and a put for $.55 with a strike price of $32. The investor sells a call for $.55 with a strike price of $42. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.) Maximum profit $ Maximum loss $ You buy a share of stock. write a one-year call option with X= $12. and buy a one-year put option with X =$12. Your net outlay to establish the entire portfolio is $1t50. What must be the risk-free interest rate? The stock pays no dividends. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Risk-free rate %

Explanation / Answer

1) Break Even price = Exercise Price + Call price = $56 + $6.10 = $62.10
2) The upside will be limited by the strike price on the covered call ($42), while the downside will be limited by the strike price of the put ($32).
Maximum profit = $42 - $39 = $3
Maximum loss = $32 - $39 = -$7
3)
We use the Put-Call Parity relationship.
C + D(t)*K = P + S
Where:
C = Call price =
D(1) = Discount factor for one year maturity
K = Strike Price ($12)
P = Put Price =
S = Current stock price.
Portfolio = S - C + P = $11.50
Substituting from above we find that S - C + P = D(1)*K
Therefore D(1) x K = D(1) x $12 = $11.50
D(1) = $11.50/$12 = 0.96
Risk free rate under simple annual compounding =1/(.96) = 1.04%

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