J&L,Inc. stock has a current market price of $55 a share. The one-year call on J&L stock with a strike price of $55 is priced at $2.50 while the one-year put with a strike price of $55 is priced at $1. What is the risk-free rate of return?

Question

Quizplus · Accepted Answer

Using the put-call parity formula: 
Call price - Put price = Stock price - Present value of strike price
$2.50 - $1 = $55 - PV(strike price)
$1.50 = $55 - PV(strike price)
PV(strike price) = $53.50

Thus, the risk-free rate of return can be calculated using the formula: 
r = (Stock price - PV(strike price)) / PV(strike price)
r = ($55 - $53.50) / $53.50
r = 0.028 or 2.80%

J&L,Inc Stock Has a Current Market Price of $55 a Share