BuyFindarrow_forward

Fundamentals of Financial Manageme...

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

Solutions

Chapter
Section
BuyFindarrow_forward

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

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Compare the four forms of competition.

Foundations of Business (MindTap Course List)

Should an economic model describe reality exactly?

Principles of Microeconomics (MindTap Course List)

What does the invisible hand of the marketplace do?

Principles of Economics (MindTap Course List)

What are the four types of control activities?

College Accounting, Chapters 1-27

What is a mixed account? A contra account? Give an example of each.

College Accounting (Book Only): A Career Approach

REGRESSION AND RECEIVABLES Edwards Industries has 320 million in sales. The company expects that its sales will...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)