You know that the one-year call on Rump Gumb stock with a strike price of $65...

You know that the one-year call on Rump Gumb stock with a strike price of $65 is priced at $2.20 while the one-year put on the Rumb Gumb stock with a strike price of $65 is priced at $11.18. The annual risk-free rate is 3.8 percent, compounded continuously.

Can you find the current price of Rumb Gumb stock? What is it?

Expert Solution

As per put call parity

Call price + PV of exercise price = Spot price + Put price

2.2+65*e^(-0.038*1)=Spot price+11.18

Spot price = 53.6

jeff jeffy answered 3 years ago

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