A stock is currently selling for $32 a share. A call option on the stock is available for $3.40 with a strike price of $30 and three months to maturity. The risk-free rate is 4% and the market rate is 11%. What is the price of a 3-month put option with the same strike and expiration? Assume the options are European style.
A) $0.30
B) $0.83
C) $1.11
D) $1.23
E) $1.40

Question

Quizplus · Accepted Answer

We can use the put-call parity formula to find the price of the put option:

Put option price + Stock price = Call option price + Present value of Strike price

Since the call option has a strike price of $30, we need to calculate the present value of $30 three months from now:

PV = $30 / (1 + 0.11/4)^3 = $26.73

Plugging in the known values, we get:

Put option price + $32 = $3.40 + $26.73

Put option price = $1.11

A Stock Is Currently Selling for $32 a Share