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 $110 per share, and the price of a 3-month call option at an exercise price of $110 is $6.53. a. If the risk-free interest rate is 8% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $110? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$3.86

Step-by-step explanation:

According to the scenario, computation of the given data are as follow:-

Current price of stock (S0) = $110

Call option at exercise price X is $110

Three month call option price (C) = $6.53

Risk free interest rate = 8%

Price of the three month P.U.T.T option (P) = C - S0 + PV (X)

= $6.53 - $140 + $140 ÷ (1+8%)^(3÷12 )

= $6.53 - $140 + $140 ÷ (1+8%)^.25

= $6.53 - $140 + $140 ÷ 1.019427

= $6.53 - $140 + $137.33

= $3.86