A European call and a European put on a stock have the same strike price and time to maturity.At 10:00am on a certain day,the price of the call is $3 and the price of the put is $4.At 10:01am news reaches the market that has no effect on the stock price or interest rates,but increases volatilities.As a result the price of the call changes to $4.50.Which of the following is correct?
A) The put price increases to $6.00
B) The put price decreases to $2.00
C) The put price increases to $5.50
D) It is possible that there is no effect on the put price

Question

Quizplus · Accepted Answer

The price of the call has increased by $1.50.From put-call parity the price of the put must increase by the same amount.Hence the put price will become 4.00 +1.50 = $5.50.

A European Call and a European Put on a Stock