Question

PLEASE SOLVE THE B.

(Option valuation) A stock price is currently 40€. It is known that at the end of 1 month it will be either 42€ or 38€. The risk-free interest rate is 8% per annum with continuous compunding. a. What is the value of a 1-month European call option with a strike price of 39€? = 1,69€

b. USE PUT-CALL PARITY TO SOLVE THE VALUATION OF THE CORRESPONDING PUT OPTION.

Answer 1

Current market price =	40.00€
Risk free interest rate per annum =	8%
Period =	1 month
One month interest rate = 8/12=	0.67% or 0.0067
Value of call option =	1.69€
As per put call parity =	Current market price + Put option value = P.v. of STRIKE PRICE + call option value
As per formula
40 + Put option value =	( 39 / (1+0.0067) ) + 1.69
Put option value =	38.74172185 +1.69-40
Put option value =	0.43€
So, value of put option is 0.43€