a]
Borrowing is done by shorting a risk-free bond.
A synthetic short position on $120,000 face value risk-free bond is created as below :
b]
Put call parity equation is given as :
C + (X / ert) = S + P, where
C = price of call option
X = exercise price
S = price of underlying stock
P = price of put option
r = risk free rate
t = time to expiry (in years)
Substituting the values into this equation, we get :
10 + (120 / er*0.5) = 120 + 8
120 / er*0.5 = 118
e0.5r = 120 /118
0.5r = LN(120/118)
r = 3.36%
The rate of interest is 3.36%
Assume that a stock price is $120 per share and the stock does not pay any...
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