Luigi would like to hold a protective put position on the NintendoX Co. stock to...
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Luigi would like to hold a protective put position on the NintendoX Co. stock to lock in a guaranteed minimum value of $50 at year-end. NintendoX currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on NintendoX Co.
Form a portfolio of one share of stock and 2 shares of puts. What is the (nonrandom) payoff to this portfolio at t=1? Suppose the desired put options with X = 50 were traded.
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