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The common stock of Texas Energy Company is selling at $90. A 1-year call option written...

The common stock of Texas Energy Company is selling at $90. A 1-year call option
written on Texas’s stock is selling for $8. The call’s exercise price is $100. The risk-free
interest rate is 1% per year. Suppose that puts on Texas stock are not tradable, but you
want to hold one. How would you do it? Suppose that puts are traded, what should a 1-
year put with an exercise price of $100 sell for?

Solutions

Expert Solution

To create a synthetic put: Buy 1 call, sell 1 share of underlying stock and invest/lend money at risk free rate of 1%.

Using Put Call parity
P=C+X/(1+r)^t-S=8+100/(1+1%)^1-90=17.010
Price of put=17.010

jeff jeffy answered 2 years ago
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