Question

You are faced with the probability distribution of the HPR on the stock market index fund given in Spreadsheet 5.1 of the text. Suppose the price of a put option on a share of the index fund with exercise price of $110 and time to expiration of 1 year is $12, and suppose the risk-free interest rate is 6% per year. You are contemplating investing $107.55 in a 1-year CD and simultaneously buying a call option on the stock market index fund with an exercise price of $110 and expiration of 1 year. What is the probability distribution of your dollar return at the end of the year

Answer 1

Answer:

Follows are the solution to this question:

Explanation:

The price of one share plus one choice for the index fund is $112. Its distribution of HPR probabilities on the portfolio is:  

$\boxed{\left \begin{array}{cccc} \text{economy states} & \text{Probability}& \text{Endig price+Put+Dividend}&HPR\\ Excellent &0.25& \ 131.00& \frac{(131-112)}{112} = 17\% \\Good &0.45&\ 114.00& \frac{(114-112)}{112} = 1.8 \% \\poor &0.25& \ 113.00& \frac{(113.50 -112)}{112} = 1.3 \% \\ Crash&0.5& \ 112.00& \frac{(112-112)}{112} = 0.0 \% \end{array}\right}$ The chances of dollar return distributions on the CD plus call option can be defined in the attached file please find it: