The price of a European put option on Scotiabank stock with one year to expiry is trading at $1.05,and the price of a European call option is trading at $3.15.If the stock is currently trading at $43.25,and the risk-free rate is 3%,what is the exercise price of the options?
A)$41.15
B)$42.38
C)$43.25
D)$46.71
E)$39.95

Question

Quizplus · Accepted Answer

Let the exercise price of put option be Kp
Let the exercise price of call option be Kc

Using put call parity, we have:

Kp + e^(-rt) x 1.05 = Kc + e^(-rt) x 43.25 - 3.15

where r is the risk-free rate

Substituting the values:

Kp + 0.9704 = Kc + 39.8348

Kp - Kc = 38.8644

Also, from the information given, we know that:

Kp + 43.25 x e^(-rt) = 43.25 - 1.05

Substituting the value of r and solving for Kp, we get:

Kp = $42.38

Hence, the answer is B) $42.38

The Price of a European Put Option on Scotiabank Stock