A stock is valued at $25.75 a share. A European 6-month call option has a strike price of $25 and an option premium of $1.40. The market rate is 9.5 percent and the risk-free rate is 2.5 percent. What is the price of a European 6-month put option with a $25 strike price?
A) $0.00
B) $0.09
C) $0.34
D) $1.48
E) $1.61

Question

Quizplus · Accepted Answer

Using the put-call parity for European options: P = C + PV(K) - S, where P is the put price, C is the call price ($1.40), PV(K) is the present value of the strike price ($25 discounted at the risk-free rate of 2.5% for 6 months), and S is the stock price ($25.75). Calculating gives P = $1.40 + ($25 / (1 + 0.025/2)) - $25.75 = $0.34.

A Stock Is Valued at $25