   Chapter 18.A, Problem 1P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PUT-CALL PARITY A put option written on the stock of Ellis Enterprises (EE) has an exercise price of $30 and 9 months remaining until expiration. The risk-free rate is 5%. A call option written on EE has the same exercise price and expiration date as the put option. EE’s stock price is$45. If the call option has a price of $18.99, what is the price (i.e., value) of the put option? Summary Introduction To determine: The price of put option. Introduction: Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date. There are two types of options, which are as follows: • An option that buys an asset called call option • An option that sells an asset called put option Explanation E Company has a stock on the put option with an exercise price of$30 and there is 9 months period for expiration. The risk-free rate is 5 percent. Even a call option was written on the Company’s stock with the similar exercise price and expiration period as the put option. The stock price of the E Company is $45 and the call option price is$18.99.

The formula to compute the price of put option is as follows:

Put option=VP+ XerRFt

Where,

V refers to the value of option

P refers to the current price of stock

X refers to the exercise price of option

rRF refers to the risk-free rate

t refers to the number of periods

Compute the price of put option:

Note: The value of “e” is 2.718281828.

Put option=VP+ XerRFt=\$18

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