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A put option with a strike price of $50 sells for $6.1. The option expires in two months, and the current stock price is $53. If the risk-free interest rate is 3 percent, what is the price of a call option with the same strike price?

User Mukesh
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Final answer:

To calculate the price of the call option, we use the put-call parity relationship with the given values: current stock price at $53, put option price at $6.1, strike price at $50, and the risk-free interest rate at 3%, assuming a two-month expiration.

Step-by-step explanation:

Black-Scholes Option Pricing Model

The subject in question refers to the valuation of financial derivatives, specifically, the calculation of a call option price given the price of a put option. This is typically approached using the Black-Scholes model. According to the put-call parity, a put and a call option with the same strike price and expiration date, on the same underlying stock, should have a predictable relationship in pricing. To calculate the call option price given the current stock price of $53, the put option price of $6.1, strike price of $50, and the risk-free rate of 3%, we use the put-call parity formula:

C + X/(1+r)^n = P + S

where

  • C is the call option price,
  • X is the strike price,
  • r is the risk-free interest rate,
  • n is the time to expiration,
  • P is the put option price,
  • S is the current stock price.

Assuming the time to expiration is two months, we can substitute the known values into the equation to find the unknown call option price.

User Rishiag
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