Question

A put option on a stock with a current price of $42 has an exercise price of $44. The price of the corresponding call option is $3.60. According to put-call parity, if the effective annual risk-free rate of interest is 6% and there are four months until expiration, what should be the price of the put? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

The price of the put should be $4.73.

Explanation:

Please find the below for detailed explanations and calculations:

We have the put-call parity as:

C + PV(S) = P + MP in which:

C= Price of a call option = $3.6;

PV(S) = Present value of exercise price = 44*e^-6%*(4/12) = $43.13;

MP = current market price = $42.

Thus, P = Value of the put = C +PV(S) - MP = 3.6 + 43.13 - 42 = $4.73

So, the answer is : "The price of the put should be $4.73."