Question

The common stock of Triangular File Company is selling at $108. A 26-week call option written on Triangular File’s stock is selling for $26. The call’s exercise price is $118. The risk-free interest rate is 6% per year.

a. Suppose that puts on Triangular stock are not traded, but you want to buy one. Which combination will produce the same results?

• Buy call, invest PV(EX), sell stock short

• Sell call, invest PV(EX), sell stock short

• Buy call, lend PV(EX), buy stock

• Sell call, lend PV(EX), buy stock

b. Suppose that puts are traded. What should a 26-week put with an exercise price of $118 sell for? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Given data follows below:

The common stock of Triangular File Company is selling at= $108

Week call option =  26

Triangular File’s stock is selling for = $26

Call’s exercise price is = $118

Risk-free interest rate is = 6% per year

Exercise price of sell = $118

a) Triangular stock are not traded, but you want to buy one. Which combination will produce the same results

Option A

P=C+Xe^(-rt)-S
Buy call, buy bond sell stock
Buy call, invest PV(EX), sell stock short

2.
Case 1: Continuous compounding
P= $26+$118*e^(-6%*26/52)- $108=$32.5125729

Case 2: Annual compounding
P=26+118/(1+6%)^(26/52)-108=37.0295630141

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