A call option sells for $1.50, and a put option sells for $2.80. Both options are European style having a strike price of $25 and three months to expiration. If the risk-free rate is 4 percent, what is the price of the stock?
A) $23.46
B) $92.02
C) $101.79
D) $96.91
E) $99.68

Question

Quizplus · Accepted Answer

The price of the stock can be calculated using the put-call parity for European options, which is given by the formula: $C + Ke^{-rt} = P + S$, where $C$ is the price of the call option, $P$ is the price of the put option, $K$ is the strike price, $r$ is the risk-free rate, $t$ is the time to expiration (in years), and $S$ is the current stock price. Plugging in the given values: $1.50 + 25e^{-0.04 \times 0.25} = 2.80 + S$. Solving for $S$ gives approximately $23.46.

A Call Option Sells for $1