Question

A call option is currently selling for $3.40. It has a strike price of $60 and seven months to maturity. What is the price of a put option with a $60 strike price and seven months to maturity? The current stock price is $61, and the risk-free interest rate is 6 percent. What is the Put Price ?

I put 0.34 but it was not the correct answer.

Answer 1

As per Put Call Parity, the prices of options with same strike price & expiry date are as follows:

Price of Call + PV of Exercise Price = Spot Price (Current Stock Price) + Price of Put

Interest Rate is assumed as annually compounded. Therefore, Interest Rate for 7 months = 0.06*7/12 = 0.035

(Note: Normally, it is assumed as continuosly compounded. But, as per continuously compounding, the answer is 0.34, which is incorrect.)

3.4 + 60/(1+0.035) = 61 + P

3.4 + 57.97 - 61 = P

Therefore, Price of Put = P = $0.37