The price of a European put option on Power Financial Corp stock with one year to expiry is trading at $0.55,and the price of a European call option is trading at $2.15.If the exercise price of the options is $19,and the risk-free rate is 3.5%,what must be the current price of Power Financial stock?
A)$20.00
B)$20.60
C)$21.15
D)$16.76
E)$19.96

Question

Quizplus · Accepted Answer

Using the put-call parity formula for European options: C - P = S - Xe^(-rt), where C is the call price, P is the put price, S is the stock price, X is the exercise price, r is the risk-free rate, and t is the time to expiration. Plugging in the values: 2.15 - 0.55 = S - 19e^(-0.035*1). Solving for S gives approximately $19.96.

The Price of a European Put Option on Power Financial