Luther Industries is currently trading for $27 per share. The share pays no dividends. A one-year European put option on Luther with an exercise price of $30 is currently trading for $2.60. If the risk-free interest rate is 6% per year, then the price of a one-year European call option on Luther with an exercise price of $30 will be closest to:
A)$1.30
B)$1.95
C)$2.60
D)$7.10

Question

Quizplus · Accepted Answer

Using the put-call parity for European options: C - P = S - PV(K), where C is the call price, P is the put price, S is the stock price, and PV(K) is the present value of the strike price. Here, C - 2.60 = 27 - 30/(1.06), solving for C gives approximately $1.30.

Luther Industries Is Currently Trading for $27 Per Share