The price of a European put option on Bombardier stock with one year to expiry is trading at $2.25,and the price of a European call option is trading at $1.50.If the stock is currently trading at $4.75,and the risk-free rate is 4%,what is the exercise price of the options?
A)$3.75
B)$3.12
C)$5.72
D)$4.75
E)$3.03

Question

Quizplus · Accepted Answer

Using the put-call parity for European options: $C + Ke^{-rt} = P + S$, where $C$ is the call price, $P$ is the put price, $S$ is the stock price, $K$ is the exercise price, $r$ is the risk-free rate, and $t$ is the time to expiry (in years). Substituting the given values: $1.50 + Ke^{-0.04} = 2.25 + 4.75$. Solving for $K$ gives $K = 5.72$.

The Price of a European Put Option on Bombardier Stock