Question

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).

Answer 1

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