1. Given a 3-month put price is 4.5 at strike price of 57.5 on an asset that is

Question

1. Given a 3-month put price is 4.5 at strike price of 57.5 on an asset that is currently trading at 55.17. Assume risk free rate to be 7%. What is the price of a call option with strike price of 57.5 with 3 month maturity on the same asset? Show how you got the value. (Hint: You can use Put-Call parity to solve this)

2. Suppose you have bought a put option with strike price of $30.00 by paying $2.00 two months ago. On the expiration day, price of the stock is $28.62. What should you do? What is your total profit or loss on this trade?

Explanation / Answer

1. Put call parity equation:

C + X/(1+r)^t = S + P

Where C - call price

S - Stock price

P - Put price

X - Strike price

r - interest rate

t - time period

r = 7% = 7/4 for 3 months = 1.75% for 3 months

t = 3months =

C = S + P - X/(1+r)^t

C = 55.17 + 4.5 - 57.5/(1.0175)^3

C = 5.08

2.

Strike price = 30

Put premium paid = 2

Stock Price on expiration = 28.62

Now , put option is in money is stock price < stike price. So in our example, put option is in money

Put option payoff = Strike price - Stock price - Put premium paid

Put option payoff = 30 - 28.62 - 2

Put option payoff = -0.62 (loss)

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