Suppose a Situation Exists Where You Can Purchase a Share

question 21

Essay

Suppose a situation exists where you can purchase a share of stock for $25, purchase a put option on the stock for $3, and write a call option against the stock for $4. Also suppose that holding these three positions guarantees a payoff of $30 one year from today. If the risk free rate is 20%, does put-call parity hold? If not, then what new price of the put option would allow put-call parity to hold?

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Definitions:

Optimal Overlap

The ideal arrangement of actin and myosin filaments within a muscle fiber for maximum muscle contraction efficiency.

Muscle Tension

The force generated by the contraction of muscles, important in movement, maintenance of posture, and the production of body heat.

Contraction

The process of a muscle becoming shorter and tighter, usually in response to a nerve impulse.

Isometric Contraction

Muscle contraction in which the length of the muscle does not change but the tension produced increases.