1. a. If you can’t sell a share short, you can achieve exactly the same final payoff by a combination of options and borrowing or lending. What is this combination?
b. Now work out the mixture of stock and options that gives the same final payoff as investment in a risk-free loan.
2. The common stock of Triangular File Company is selling at $90. A 26-week call option written on Triangular File’s stock is selling for $8. The call’s exercise price is $100. The riskfree interest rate is 10% per year.
a. Suppose that puts on Triangular stock are not traded, but you want to buy one. How would you do it?
b. Suppose that puts are traded. What should a 26-week put with an exercise price of $100 sell for?