Horizon Builders’ common stock is currently selling at $32. You estimated that it has a standard deviation of 0.3. Assume the risk-free interest rate is 4 percent per year.
What is the maximum you would pay for a 26-week put option with an exercise price of $35 on Horizon Builders’ stock? There are 52 weeks in a year.
If you can’t sell a share short, you can achieve exactly the same final payoff by a combination of risk free bonds and options. What is the combination? Please describe in words.