Question

1a) The current price of a stock is $43, and the continuously compounded risk-free rate is 7.5%. The stock pays a continuous dividend yield of 1%. A European call option with a exercise price of $35 and 9 months until expiration has a current value of $11.08. What is the value of a European put option written on the stock with the same exercise price and expiration date as the call? Answers: a. $5.17 b. $3.08 c. $1.49 d. $2.50 e. $–11.08

1b)

Suppose a stock’s price is $25, and the continuously compounded interest rate is 4.5%. The stock does not pay dividends. To ensure that arbitrage is not possible, what should be the difference (C – P) between the price of a 6-month $30-strike European call and the price of a 6-month $30-strike European put?

Answers: a. $–4.89 b. $–3.73 c. $–4.33 d. $–5.00 e. $–5.56 1c) Suppose the exchange rate is $1.23/€, the euro-denominated continuously compounded interest rate is 8%, the U.S. dollar-denominated continuously compounded interest rate is 2%, and the price of a 6-month $1.30-strike European call on the euro is $0.0839. What is the value of a 6-month $1.30-strike European put on the euro? Answers: a. $0.2184 b. $0.1892 c. $0.1539 d. $0.1152 e. $0.1740 Please explain the steps and forumulas. Thank you.