Suppose Big Electronics’ stock price is currently $70. A
six-month European call option on the stock with exercise price of
$70 is selling for $6.41. The risk free interest rate is $7%.
What is the six-month European put option on the same stock with
exercise price of $70 if there is no arbitrage?[x] (sample answer:
$5.40)
We can compute Put option price using Put-Call parity equation:
where,
C = Call price
X = Strike price
S = Stock price
P = Put Price
r = risk free rate
t = time to maturity
We can rewrite above equation:
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