The common stock of the P.U.T.T. Corporation has been trading in a narrow price
ID: 2804111 • Letter: T
Question
The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 3 months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a 3-month call option at an exercise price of $100 is $10.
If the risk-free interest rate is 10% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
What would be a simple options strategy to exploit your conviction about the stock price’s future movements? How far would it have to move in either direction for you to make a profit on your initial investment? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)
a.
If the risk-free interest rate is 10% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
a. price of the put = price of call + exercise price/(1+risk free rate)n - spot price
price of the put = 10 + 100/1.103/12 - 100
price of the put = 7.65
b. total cost of straddle = 7.65 + 10 = 17.65