Question

Q3) Consider a stock that pays no dividends whose value equals the strike price of a call and put with identical contract terms on the stock. Interest rates are positive. Then, which of the following is true? (Hint: Use put-call parity for European Options and the fact B < 1)

a) the call price must equal the put price

b) the call price will be greater than the put price

c) the call price will be less than the put price

d) the call price will be less than or equal to the put price

e) None of these answers are correct.

Answer 1

Solution :

Given that stock price is equal to strike price so let's assume stock price is S and strike price is X

Using put-call parity formula

So from the equation, we can see that

X e^(-rT) < S , Because X = S and e^(-rT) <1 if r is positive

So, if X e^(-rT) < S then in order to balance the equation C > P.

So call option premium should always be greater than put option premium

Correct option is B