A stock is currently selling for $21. A 3-month call option with a strike price of $20 has an option premium of $1.30. The risk-free rate is 3% and the market rate is 8%. What is the option premium on a 3-month put with a $20 strike price? Assume the options are European style.
A)$0
B)$.15
C)$.35
D)$.55
E)$.75

Question

Quizplus · Accepted Answer

To find the put option premium, we can use the put-call parity formula for European options, which is: $C + Ke^{-rt} = P + S$, where $C$ is the call premium, $K$ is the strike price, $r$ is the risk-free rate, $t$ is the time to expiration (in years), $P$ is the put premium, and $S$ is the current stock price. Plugging in the given values: $1.30 + 20e^{-0.03 \times 0.25} = P + 21$. Solving for $P$ gives us approximately $0.15.

A Stock Is Currently Selling for $21