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
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