The price of a stock is $40. There are both call and put options on this stock. Both options have an exercise price of $40 and expire in two months. The market return is 10% and the risk-free rate is 4%. Given this, you know the
A) Call option must be worthless
B) Put option must be worthless
C) Call option price is greater than the put option price
D) Put option price is greater than the call option price
E) Both (A) and (B)

Question

Quizplus · Accepted Answer

The price of the call option is generally higher than the put option for at-the-money options (where the exercise price is equal to the stock price) due to the cost of carry. The cost of carry makes holding the underlying asset more expensive due to factors like the risk-free rate, which in this case is 4%. Since the holder of the call option benefits from the stock's potential appreciation without having to own the stock, while the put option holder benefits from potential depreciation, the call option's price incorporates the cost of carry, making it more expensive than the put option in a positive interest rate environment.

The Price of a Stock Is $40