Question

You are presented with the following information: You can buy calls and/or put options on a...

You are presented with the following information:

You can buy calls and/or put options on a stock with a current price of $59.00. The striking price for either option is $61.00. A call option with that striking price has a current value of $6.20. The prevailing risk-free rate is 6.00%. What must be the current value of a put option on the stock? Both options (calls and puts) written on the same stock and both with 1 year until expiration. *** 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

Step 1 - Concept - Put call parity

As per Put Call Parity (PCP)

Price of call option + Present Value of strike price = Price of Put option + Current Stock Price

Present value of strike price = 61 / 1.06 = 57.5471

Step 2 - Putting the values in the above equation

Price of call option + Present Value of strike price = Price of Put of Put + Current Stock Price

6.2 + 57.5471 = Price of put option + 59

Price of put option = 4.7471

Therefore value of put option = 4.7471

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