An investor wants to exactly replicate the put option's payoff so he considers to buy X shares of the stock and Y shares of bonds. Suppose the stock price is $70 and the bond price with coupon rate 5% is $100. The stock price will either go up 15% or down 8% in one year. There are one European call option and one European put option with exercise price of $70 that will be expired in one year. Short selling is allowed. What are the values of X and Y?
Unitary Method
The word “unitary” comes from the word “unit”, which means a single and complete entity. In this method, we find the value of a unit product from the given number of products, and then we solve for the other number of products.
Speed, Time, and Distance
Imagine you and 3 of your friends are planning to go to the playground at 6 in the evening. Your house is one mile away from the playground and one of your friends named Jim must start at 5 pm to reach the playground by walk. The other two friends are 3 miles away.
Profit and Loss
The amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item.
Units and Measurements
Measurements and comparisons are the foundation of science and engineering. We, therefore, need rules that tell us how things are measured and compared. For these measurements and comparisons, we perform certain experiments, and we will need the experiments to set up the devices.
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