Question

q 15

"A six month European put with a strike price of $35 is available for $2.5.The underlying stock price is $33 and stock does NOT pay dividends. The term structure is flat, with all risk free interest rates being 8% for all maturities. What is the price of a six month European call option with a strike price of $35 that will expire in six months? " "(Enter your answer in two decimals without $ sign)

Answer 1

q 15

We can use put-call parity equation for calculation of price of European call option.

C0+X*e-r*t = P0+S0

C0 = call price; X = strike price of call; r = risk-free interest rate; t = time period; P0 = put price; S0 = underlying price

time period = no. of months of the option/no. of months in a year = 6/12 = 0.5

C0 + $35*e-0.08*0.5 = $2.5 + $33

C0 + $35*e-0.04 = $35.5‬

C0 + $35*0.9608 = $35.5

C0 + $33.63 = $35.5

C0 = $35.5 - $33.63 = $1.87

the price of a six month European call option with a strike price of $35 that will expire in six months is $1.87.