A stock is selling for $62 per share. A call option with an exercise price of $65 sells for $3.85 and expires in three months. The risk-free rate of interest is 2.8 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date?
A) $6.74
B) $6.23
C) $6.67
D) $6.40
E) $6.95

Question

Quizplus · Accepted Answer

The price of the put option can be calculated using the put-call parity formula: $ p + S = c + Xe^{-rt} $, where $ p $ is the price of the put option, $ S $ is the current stock price, $ c $ is the price of the call option, $ X $ is the exercise price, $ r $ is the risk-free rate, and $ t $ is the time to expiration in years. Substituting the given values: $ p + 62 = 3.85 + 65e^{-0.028 \times 0.25} $. Solving for $ p $ gives approximately $6.40.

A Stock Is Selling for $62 Per Share