Question

The common stock of the Pat plc. corporation has been trading in a narrow range around £145

per share for months, and you believe it is going to stay in that range for the next 12 months. The

price of a 12-month European put option with an exercise price of £145 is £8.19.

i) If the risk-free interest rate is 9% per year, what must be the price of a 12-month call option

on Pat plc. stock at an exercise price of £145 if it is at the money? (The stock pays no

dividends).

Answer 1

The price of the call option can be calculated using the Put-Call parity as shown in the following screenshot:

So the price of a 12-month call option must be 20.67