Calculate the price of a European call option if the price of the equivalent European put option is $5 and the share price,exercise price and risk-free rate (continuously compounded)are $31,$28 and 12% p.a. ,respectively.The options have three months to expiry.

Question

Quizplus · Accepted Answer

To find the price of the European call option, we can use the put-call parity formula for European options, which is: C + Ke^(-rt) = P + S, where C is the call price, P is the put price, S is the current stock price, K is the strike price, r is the risk-free rate, and t is the time to maturity (in years). Plugging in the given values: C + 28e^(-0.12*0.25) = 5 + 31. Solving for C gives us approximately $8.83, hence option B is correct.

Calculate the Price of a European Call Option If the Price