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In: Finance

Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease dramatically...

Richards Inc. stock currently trades for $40, but you believe the company's earnings will decrease dramatically in the next six months which in turn will cause the company's stock to depreciate. Six-month European call options on the stock have an exercise price of $45 and a premium of .75. The annual risk free rate is 3%. You want to create a portfolio that mimics the payoff of owning a 6-month European put on on the stock. Which of the following steps must you do in order to achieve this payoff?

  • Buy the call option, sell the stock, and borrow the present value of $4500 discounted at the risk-free rate.
  • Sell the call option, buy the stock, and invest the present value $4500 discounted at the risk-free rate.
  • Buy the call option, sell the stock, and invest the present value of $4500 discounted at the risk-free rate.
  • Sell the call option, sell the stock, and invest the present value $4500 discounted at the risk-free rate

What should be the price of a six-month European put option with an exercise price of $45 according to put-call parity? Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Find your portfolio's profit/loss if Richards stock sells for $32 at the end of six-months. Round intermediate steps to four decimals.

  • 508
  • 792
  • -792
  • -508
  • 658

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