Question

A call and a put option both having a strike price of $50 and maturing after 6 months have premiums of $4 and $2.20, respectively. An existing long forward contract with a delivery price (old forward price) of $50 will have a value of?

Answer #1

Given in the question

Strike price i.e (E) of both the call and put option is $50

Premium for both the option are $4 and $2.20 respectively.

We take that Current stock price i.e (S) is also $50 by assuming
that the data provided about the existing long forward contract
with delivery price of $50

When both the E and S are equal then it means that both options
are "at the money". If in call option S>E then call is "in the
money" and if S<E then call is "out of the money" and in put
option it is vice versa.

When S=E then intrinsic value of call as well as put is Zero.

In our question values are-

E=$50

S=$50

Hence intrinsic value for call= S-E

=50-50

=0

Intrinsic value for put= E-S

=50-50

=0

Value of long forward contract will be Zero.

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