Suppose a Stock Can Be Purchased for $8, a Put

question 56

Multiple Choice

Suppose a stock can be purchased for $8, a put option on the stock can be purchased for $1.50, and a call option on the stock can be written (i.e., sold) for $1.00. If holding these positions in combination can guarantee a payoff of $10 at the end of the year, then what must be the risk-free rate if no arbitrage opportunities exist?

• A) 12.50%.
• B) 5.50%.
• C) 17.65%.
• D) 33.33%.
• E) 18.75%.

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