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 three 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. 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.)

Answer 1

A.$7.65

B. $17.65

C. $18.07

Step-by-step explanation:

Calculation for the price of a 3-month put option on P.U.T.T. stock

Using this formula

P = C-S+[X/(1+r)T]

Where,

C represent call option price =$ 10

S represent spot price = $100

X represent exercise price =$100

T represent time period of put option =3 or 1/4months

R represent risk free return =10%

Let plug in the formula

P = C-S+[X/(1+r)T]

P = 10-100+[100/(1+0.10)1/4]

P = 10-100+[100/(1.10)1/4]

P = 10-100+[100/1.0241]

P = 10-100+97.65

P = 10-2.35

P = $7.65

Therefore the price of a 3 month put option stock will be $7.65

B. Calculation for What would be a simple options strategy .

The simple options strategy will be the straddle which will inturn enable the investor to buy one put option as well as one call option

Now let calculate for the The Total cost of straddle option

The Total cost of straddle option is = $10+$ 7.65

The Total cost of straddle option= $ 17.65.

The amount of amount of Total cost of straddle option will be $ 17.65.

C.Calculation for How far would it have to move in either direction inorder to make a profit ontl the initial investment

Inital investment Profit= $ 17.65×(1.10)^1/4

Initial investment Profit=$ 17.65×1.0241

Initial investment Profit= $ 18.07