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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
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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

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Answer:

Follows are the solution to this question:

Step-by-step 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& ((131-112))/(112) = 17\% \\Good &0.45&\$ 114.00& ((114-112))/(112) = 1.8 \% \\poor &0.25& \$ 113.00& ((113.50 -112))/(112) = 1.3 \% \\ Crash&0.5& \$ 112.00& ((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:

You are faced with the probability distribution of the HPR on the stock market index-example-1
User Dennis Ich
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