Question

The current stock price of Johnson and Johnson is $64 and the stock does not pay dividends. The instantaneous risk free rate of return is 5%. You wish to purchase a call option on this stock with an exercise price of $55 and an expiration date 73 days from now. Using the put option price of $0.074 from the market and Put-Call Parity, the call option should be worth __________ today.a. $.01b. $.07c. $9.26d. $9.62

Answer 1

Answer:

Call Value = $9.62

so correct option is d. $9.62

Explanation:

given data

stock price = $64

rate of return = 5%

exercise price = $55

expiration date = 73 days

put option price = $0.074

to find out

call value option should be worth

solution

we will apply here according to the Put Call Parity that is  

Put Value + Stock Price = Call Value + [Exercise Price × $e^{-{r*t}}$ ]  ..........1

put here value we get  

$0.074 + $64 = Call Value +  [$55 × $e^{-{0.05*73/365}}$ ]

solve it we get

Call Value = $9.62

so correct option is d. $9.62