The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise price of $930, is $8.00. At what index price does a long put investor have the same payoff as a short index investor? Assume the short position has a breakeven price of $930.
A) $921.90
B) $930.00
C) $938.10
D) $940.00

Question

Quizplus · Accepted Answer

The breakeven for the long put investor is the exercise price minus the premium, which is $930 - $8 = $922. To have the same payoff as the short index investor, the index price must be adjusted for the interest rate: $930 / (1 + 0.004)^3 ≈ $938.10.

The Spot Price of the Market Index Is $900