A European call option on Visa stock costs $85.36, while a European put option on the...

A European call option on Visa stock costs $85.36, while a European put option on the same stock costs $31. Both options expire in 0.5 years and have a strike price of 800. Google does not pay dividends and its stock price is $850.

What should be the risk-ree rate (effective annual rate)?

Solutions

Expert Solution

According to put call parity

Cash Investment + Call option premium = Stock + Price of put option

{for above equation to hold, Strike price of both call and put options must be same and Cash Investment must be present value of strike price of options}

Therefore,

Cash Investment + $85.36 = $850 + $31

Cash Investment = $795.64

Future Value of cash investment = strike price of options

Future Value of cash investment = $ 800

FV = PV x e^rt

800 = 795.64 x e^r0.5

1.00548 = e^r0.5

0.005465 = 0.5r

Therefore r = 1.093% p.a. continously compounded

jeff jeffy answered 1 year ago

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