Question

# 1. Luther Industries is currently trading for \$28 per share. The stock pays no dividends. A...

1. Luther Industries is currently trading for \$28 per share. The stock pays no dividends. A one-year European put option on Luther with a strike price of \$30 is currently trading for \$2.55. If the risk-free interest rate is 6% per year, compute the price of a one-year European call option on Luther with a strike price of \$30.

The price of one-year European call option on Luther with a strike price \$30 is ______\$ (round to four decimal places).

2. Rose Industries is currently trading for \$46 per share. The stock pays no dividends. A one-year European call option on Luther with a strike price of \$45 is currently trading for \$10.45. If the risk-free interest rate is 6% per year, calculate the price of a one-year European put option on Luther with a strike price of \$46.

The price of one-year European put option with a strike price of \$45 is_______ \$ (round to two decimal places).

3. KD Industries stock is currently trading at \$31 per share. Consider a put option on KD stock with a strike price of \$34. Calculate the intrinsic value of this put option.

The intrinsic value of this put option is______ \$ (round to the nearest number).

Solution 1.>

Exercise price: \$30

Call option price: ?

Put option price: \$2.55

Risk-free rate: 6%

Current market price: \$28

Time to maturity: 1 year

Let’s plug these values in the put-call parity equation:

C + X/(1+r)^t = P + So

C + 30/(1.06)^1 = 2.55 + 28

C = \$2.2481

Solution 2.>

Exercise price: \$45

Call option price: \$10.45

Put option price: ?

Risk-free rate: 6%

Current market price: \$46

Time to maturity: 1 year

Let’s plug these values in the put-call parity equation:

C + X/(1+r)^t = P + So

10.45 + 45/(1.06)^1 = P + 46

P = \$6.9028

Solution 3.>

Strike Price: \$34

Stock Price: \$31

Intrinsic value = Strike Price - Stock Price

= \$34-\$31

= \$3