Question

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 3 months. You do not know whether it will go up or down, however. The current price of the stock is $85 per share, and the price of a 3-month call option at an exercise price of $85 is $8.00. a. If the risk-free interest rate is 9% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $85? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

Use the following information to calculate the put option P

Current stock price $S_{0}$ is $85

Exercise price X is $85

Price of three-month call option C is $8

Risk free rate is 9%

Calculate the three-month put option P using the following formula:

$P= C - S_{0} + PV(X)$

$P = 8 - 85 + \frac{85}{(1+0.09)^{3/12} }$

P = $6.19

Therefore, the price of three-month put option is $6.19