A European call option allows one to purchase 2 shares of stock B with 1 sare of

Question

A European call option allows one to purchase 2 shares of stock B with 1 sare of stock A at the end of a year.

>Stock A pays dividends at a continuous rate of 2%

>Stock B pays dividends at a continuous rate of 4%

>The coninuously copounded risk free rate is 5%

>The current price for stock A is 70, the current price of stock B is 30

A European put option which allows one to sell 2 shares of stock B for 1 share of stock A costs 11.5. Determine the premium of the European call option mentioned above, which allows one to purchase 2 shares of stock B for 1 share of stock A.

Explanation / Answer

The option to receive 1 share of Stock A for 2 shares of stock B is the same as the optionto sell 2 shares of Stock B for 1 share of Stock A, which is the put option given in the problem. So the premium for this call option is11.5.

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