   Chapter 18.A, Problem 2P 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 The current price of a stock is $50, and the annual risk-free rate is 5.5%. A call option with a strike price of$46 and 6 months until expiration has a current value of $9.59. What is the value of a put option written on the stock with the same strike price and expiration date as the call 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 The value of call option is$9.59 with a strike price of $46 and expiries in 6 month period. The stock price at present is$50 and annual risk-free rate is 5.5 percent.

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

Put option=VP+ XerRFt

Where,

V refers to the value of call 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=$9.59$50+\$46×(2

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