Question

A put option on a stock with a current price of $38 has an exercise price of $40. The price of the corresponding call option is $3.00. According to put-call parity, if the effective annual risk-free rate of interest is 5% 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.) Price of the put

Answer 1

According to Put call parity theorem,

Call option price + (X*e^-rt ) = Put option price + current stock price

where X= strike price

3 + (40*e^-.05*4/12) = Put option price + 38

3 + (40*e^-.01667) = Put option price +38

3+ (40*.98347) =Put option price +38

3+ 39.3388 = Put option price +38

Put option price = 42.3388 -38

                 = $ 4.3388 (rounded to 4.34)

**Find value of e^-.01667 using financial calculator