#### jyothi1965

##### New Member

a. Interest rates are positively sloped around the 6-month period.

b. Interest rates are negatively sloped around the 6-month period.

c. Interest rates are at zero for the 6-month period.

d. Cannot be determined from the information given

David, the above is a question from FRM 2001.

My understanding is that options have been used to determine implied volatilities and this is the first time I am seeing options used to determine the implied interest rates. The answer is supposed to be C.

The logic is that you if you buy the call and short the stock (for six months!!!!) , you can earn interest on 50$. At expiry, you can excercise the option to buy at 50$ and square up and keep the interest.

If the stock is less than $50, you would have made money by shorting in addition to interest income

(the option of what happens if stock is above 50 is not relevant as the option holder can buy at 50)

Since this creates interest free artibtrage income and therefore interest rates have to be zero ([email protected]@?)

How on earth can one conclude that interest rates are zero?

Jyothi