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Rebecca is interested in purchasing a European call on a hot new​ stock, Up, Inc. The...

Rebecca is interested in purchasing a European call on a hot new​ stock, Up, Inc. The call has a strike price of $ 97.00 and expires in 95 days. The current price of Up stock is $ 115.78​, and the stock has a standard deviation of 40 % per year. The​ risk-free interest rate is 6.34 % per year. Up stock pays no dividends. Use a​ 365-day year.

a. Using the​ Black-Scholes formula, compute the price of the call.

b. Use​ put-call parity to compute the price of the put with the same strike and expiration date.

​(Note​: Make sure to round all intermediate calculations to at least five decimal places.​)

Solutions

Expert Solution

a.Price of call = $22.33

b. Put Call parity Equation

Call Premium + Strike Price * e^(-rt) = Put Premium + Spot Price

22.33 + 97 * e^(-0.0634*65/365) = Put Premium + 115.78

22.33 + 97 * 0.98877 = Put Premium + 115.78

$118.24069 = Put Premium + 115.78

Put Premium = $2.46069

jeff jeffy answered 1 year ago
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