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**

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