Answer to Question #71602 in Finance for Nick Mango

Question #71602

The current price of a non-dividend paying stock is $2600. You collect the following
additional information on the stock: E[R] = 9%, and σ[R] = 20%. The term structure
of interest rates is flat with r = 2%. For this question, you will be considering options
with a maturity T of one year and a strike price X = $2650
a) What is the expected return of the following trading strategy: (i) buy two call
options on the stock, (ii) sell two put options on the stock, (iii) buy $5300/(1+2%)
of 1-year zero coupon bonds?

Expert's answer