A stock is valued at $25.80 a share. A European 3-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5% and the risk-free rate is 3.25%. What is the price of a European 3-month put option with a $25 strike price?
A)$0
B)$.09
C)$.40
D)$1.48
E)$1.61

Question

Quizplus · Accepted Answer

Using the put-call parity for European options: C - P = S - K * e^(-rT), where C is the call price, P is the put price, S is the stock price, K is the strike price, r is the risk-free rate, and T is the time to expiration in years. Plugging in the values: 1.40 - P = 25.80 - 25 * e^(-0.0325 * 0.25). Solving for P gives approximately $0.40.

A Stock Is Valued at $25