Question

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price of a 3-month put option with an exercise price of $50 is $4. a. If the risk-free interest rate is 10% per year, what must be the price of a 3-month call option on C.A.L.L. stock at an exercise price of $50 if it is at the money

Answer 1

Price of call option = $5.1772

Step-by-step explanation:

given data

trading x = $50 per share

Current price So = $95

time = 3 month t =
`(1)/(4)` year

exercise price of $50, P = $4

risk-free interest rate r = 10%

solution

we use here formula from put-call parity for price of a 3-month call option on C.A.L.L. stock that is

Price of call option = P + So - \frac{x}{(1+r)^t} .....................1

put here value and we will get

Price of call option = $4 + $50 - \frac{50}{(1+0.10)^{1/4}}

Price of call option = $5.1772