Question

Kate wishes to buy a European put option on ABC, Inc., a non-dividend-paying common stock, with a strike price of $60 and six months until expiration. ABC’s common stock is currently selling for $50 per share, and Tom expects that the stock price will either rise to $80 or fall to $35 in six months. The risk-free rate over the next six months is 2.47% (over next one year is 5%). How do you create a replicating portfolio with identical payoffs to the put option just described?

Group of answer choices

Short .56 of a share of stock and lend $43.37

Buy .56 of a share of stock and borrow $43.37

Short 1.80 of a share of stock and lend $43.37

Buy 1.80 of a share of stock and borrow $44.44

Short .56 of a share of stock and lend $44.44

Answer 1