A put option that expires in six months with an exercise price of $45 sells for
ID: 2745816 • Letter: A
Question
A put option that expires in six months with an exercise price of $45 sells for $4.25. The stock is currently priced at $41, and the risk-free rate is 3.5 percent per year, compounded continuously.
What is the price of a call option with the same exercise price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the price of a call option with the same exercise price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Price of the call option:
Put Call parity
S+P =Ee^-Rt +C
S=Current price of stock=$45
P = Put price=$4.25
E = Exercise price=$45
R = Risk free rate = 3.5%
t = time period = 6 months
C = Call price
$41+$4.25 =$45e^-(0.035)(6/12) +C
$45.25 =$45*0.9827+C
C = $1.0285
Call Price is $1.0285