Shares of Beech Brewery,Inc.trade at $35.Call options with a strike price of $30 trade for $7.50.The options have 1 year until expiration and the risk free rate is 4%.According to put - call parity what should be the price of a $30 put option on Beech Brewery with one year to expiration.

Question

Quizplus · Accepted Answer

In order to answer this question you need to solve for the P in the equation S+P=B+C.The stock price (S)is equal to $35.The present value of a one year bond (B)with a face value of $30 is $30/(1.04)= $28.85,and the price of the call option (C)with a strike price of $30 and one year remaining until expiration is $7.50.So the price of a $30 put option (P)with one year until expiration is equal to $28.85 + $7.50 - $35.This equals $1.35.