Expressed as the annual effective rate of return

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Reference no: EM131063939

The spot price of the TECHWIG index at the Warsaw Stock Exchange in Poland is 1020 Polish Zloty (PLN). The risk-free interest rate for the next six month period is 1.98% (this is a six month rate, not annualized). A certain famous Polish actor, whose first name is Cezary, writes a 1025 six month European call option on TECHWIG and receives a premium of PLN 2. In order to write the option, Cezary must post a margin equal to 20% of the value of the TECHWIG index at the time of option writing. He will earn interest on the margin and on the premium paid to him for the option, at the risk-free rate. In six months, TECHWIG closes at 1030. Cezary does not pay commissions or taxes, because he is a celebrity. Calculate his rate of return on this transaction, expressed as the annual effective rate of return. Cezary does not currently have any long position in TECHWIG, and will not have any through the option expiration.

A. –2.45% B. –0.06% C. 0.98% D. 1.06% E. 1.98%

Reference no: EM131063939

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