You buy a share of stock, write a one-year call option with a strike price X = $14, and buy a one-year put option with a strike price X = $14. Your net initial cost to establish the entire portfolio is $13.50. What must be the risk-free interest rate from now until the options maturity date? The stock pays no dividends.

3.70%

Explanation:

Data provided in the question:

Call strike price X = $14

Market value after 1 year = $14

Net initial cost = 13.50$

Now,

Risk Free Rate = [ (Market value - Initial cost) : Initial cost ] * 100%

or

Risk Free Rate = [ ($14 - $13.50) : $13.50 ] * 100%

or

Risk Free Rate = [ $0.50 : $13.50 ] * 100%

or

Risk Free Rate = [ 0.037 ] * 100%

or

Risk Free Rate = 3.70%