How do you construct the synthetic futures position

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Reference no: EM131247257

Suppose you can buy or sell European puts and calls on the common stock of the XYZ Corporation, which has a current share price of $30, has a rate of return standard deviation of .3, and pays no dividends. The exercise price on six-month puts and calls is $35, and the risk-free rate is 7% per year. You believe the stock price will rise and wish to create a synthetic forward contract position for delivery of 100 shares six months hence.

a) How do you construct the synthetic futures position; how much must you borrow or lend?

b) What is your expected profit if you believe the share price will be $42 six months from now?

Reference no: EM131247257

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