Question

. A stock is currently selling for $20.65. A 3-month call option with a strike price of $20 has an option premium of $1.3. The risk-free rate is 2 percent and the market rate is 8 percent. What is the option premium on a 3-month put with a $20 strike price? Assume the options are European style.

Answer 1

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As per put-call parity

P+ S = present value of X + C

P= value of put option.

S= current price of the share

X= strike price

C= value of call option.

Present value of X = X/e^r

r = risk free rate.

Given:

S= current price of share=20.65

X= strike price = 20

Present value of X = 20/e^0.02

r = risk free rate. 2%

C= value of call option = 1.3

P+ 20.65 = (20/e^0.02) + 1.3

P= $0.2539

Value of put option = $0.25