Question

Assume a call option on Greshak Corp. currently sells for $6.00 in the market and the current rate on S-T Federal securities is 5.00%. The call option on Greshak's stock has 4 months to expiration and a strike price of $35.00. If the underlying shares of Greshak Corp. sell for $46.00, what is the price of a put option with a $52.00 strike price and 4 months to expiration (assume the options are European style options)?  YOU MUST SHOW ALL WORK TO RECEIVE CREDIT. MAKE SURE YOU USE AT LEAST 4 DECIMAL PLACES IN ALL CALCULATIONS

Answer 1

Current price of Greshak Corp (S) = $46

Strike Price of Put option (E) = $52

Expiry period (t) = 4 months = 4/12 = 0.3333 year

Risk free rate = 5% p.a

Call Price (C) = $6

Put Price (P) = ?

• PUT CALL PARITY THEOREM

There is a relationship between the price of the call option and the price of a put option on the same underlying instrument with same strike price and the same expiration date. The relationship commonly referred to as the put call parity theorem. We have been considering put call parity relationship applicable only for European options.

Where,

E = Exercise Price

S = Current underlying asset price

P = Put Premium

C = Call Premium

r = risk free rate

T =Time to maturity

We can find Price of Put using above theorem.

Putting the values in equation -

Thus, Price of Put option would be $11.16

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.