Using risk-free portfolios determine the value of the, Financial Management

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Using risk-free portfolios determine the value of the

Construct trading strategies in stock only that replicate each of the two options of the following problem (A stock price is $10 now. In 1 month it can go to $11 or $9. The annual interest rate is 5% with continuous compounding. Using risk-free portfolios, determine the value of the one-month European put with strike price 10 and European call with strike price 9.5)

That means construct:

a) synthetic long put strategy with a strike price 10

b) synthetic long call strategy with strike price 9.5 What is the cost of each synthetic trading strategy?

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