Question

A stock is currently selling for $73 per share. a call option with an exercise price of $70 sells for $5.27 and expires in three months.

if the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option with the same exercise price?

Answer 1

To calculate the price of a put option with the same exercise price, we can use the put-call parity formula. According to the given information, the price of the put option is approximately $2.29.

Step-by-step explanation:

To determine the price of a put option with the same exercise price, we need to use the put-call parity formula. The formula states that the price of a call option minus the price of a put option is equal to the difference between the current stock price and the exercise price, discounted at the risk-free rate.

Using the given information, we can calculate the price of the put option:

Call option price - Put option price = Stock price - Exercise price * e^(-rt)

Plugging in the values:

$5.27 - Put option price = $73 - $70 * e^(-0.026 * 0.25)

Simplifying the equation:

Put option price = $5.27 - ($3 * e^(-0.0065))

Calculating the exponential term:

Put option price = $5.27 - ($3 * 0.9935)

Put option price = $5.27 - $2.9805

Put option price ≈ $2.29