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You would like to hold a protective put position on the stock of Avalon Corporation to loc

You would like to hold a protective put position on the stock of Avalon Corporation to loc

You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.

What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50?

A.            ½ share of stock and $25 in bills

B.            1 share of stock and $50 in bills

C.            ½ share of stock and $26.19 in bills

D.            1 share of stock and $25 in bills

Rosa Parks 08-Nov-2017

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