Question

You are presented with the following information: A call option with a current value of $10.80....

You are presented with the following information:

A call option with a current value of $10.80. A put option with a current value of $8.60. Both options written on the same stock and both with 1 year until expiration. The current price of the stock is $46.00 and the prevailing risk-free rate is 7.00%. What must be the striking price of either option? *** In your calculations, use simple discounting instead of continuous discounting. Also, do not enter the dollar sign and use two decimals (round off to 2 decimals).

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Homework Answers

Answer #1

As per Call Put Partiy

where r is the risk free rate of return i.e. 0.07

t is the time period 1

K * e^(-r*t) + 10.80 = 46 + 8.60

K * e^(-0.07*1) + 10.80 = 46 + 8.60

K * 0.9323938199 + 10.80 = 54.6

K = (54.6 - 10.80) / 0.9323938199

K = $ 46.98 OR 47 (Approx)

Strike Price is 46.98 OR 47

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