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Assume that the common stock of Luther Industries is currently traded for 47 per share. The stock pays no dividends. A 3-month European call option on Luther with a strike price of £45 is currently traded for £7.45. The risk-free rate interest rate is 2% per year. Assume that you own common stock of Luther Industries, but you are concerned about a decline in its stock price in the near future.

a) Suppose that put options on Luther Industries are not traded, but you want to have one. How could you achieve it? (Hint: design a strategy that uses a combination of financial securities)

b) Suppose that put options on Luther Industries stocks are traded. What noarbitrage price should a 3-month European put option on Luther Industries with an exercise price of £45 sell for?

c) What is the minimum profit of your portfolio after you purchase this put option?

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Financial Management, Finance

Category:- Financial Management
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