Question

A put option on a stock with a current price of $33 has an exercise price of $35. The price of the corresponding call option is $2.25. According to put-call parity, if the effective annual risk-free rate of interest is 4% and there are three months until expiration, what should be the price of the put

Answer 1

Answer:

Price of the put = $3.90

Explanation:

Given:

Stock price = $33

Strike Price = $35

Call option value = $2.25

Rate of interest = 4% = 0.04

Total time = 3 month = 3 / 12 = 0.25 year

Price of the put = ?

Computation of Price of the put:

Price of the put = Strike Price/e^(rt) + Call value - Stock Price

Price of the put = [35 / $e^{0.04\times0.25}$ ] + 2.25 - 33

= $3.90

Price of the put = $3.90