3. What portfolio of options and risk-free asset (if any) can be used to replica

Question

3. What portfolio of options and risk-free asset (if any) can be used to replicate the payoffs of a forward contract on IBM stock with 9 months to maturity. Assume the forward price satisfies no-arbitrage pricing. IBM stock currently trades for $90/share and pays no dividends within the next year. The yield curve is flat at 5%.

4. Using the same information as in question (3), what portfolio of IBM stock and risk-free bonds can be used to replicate the following portfolio. Assume all bonds have $100 face value:

(a) Long 1 call option with strike price $70 and short one put option with strike price $70

5. Using the same information as in questions (3,4), what portfolio of IBM stock and risk-free bonds can be used to replicate the following portfolio:

(a) Long 1 call option with strike price $80 and short one put option with strike price $70

Explanation / Answer

Forward contract

A forward contract is an over the counter contract between two parties who comes together and make an agreement of buy or sell underling assets at specifies price at specified time. Forward contract is over the counter agreement.

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