Montreal Smoked Meat Ltd.(MSM)shares are currently selling for $55 per hsare.The 2-year put option on MSM shares has the following characteristics: strike price = $50, price = $0.25
Given that the risk-free rate is 2%, what is the price of a 2-year call option on MSM shares with an exercise price of $50?

Question

Quizplus · Accepted Answer

To calculate the price of the call option, we need to use the put-call parity formula:

C + X / (1 + r)^T = P + S

where C is the price of the call option, X is the exercise price, r is the risk-free rate, T is the time to maturity, P is the price of the put option, and S is the current stock price.

Substituting the given values:

C + 50 / (1 + 2%)^2 = 0.25 + 55

C = 7.19

Therefore, the price of the 2-year call option on MSM shares with an exercise price of $50 is $7.19.

The correct answer is B.