Option Q

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newsuper

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Assume that the value of a put option with a strike price of $100 and six months remaining to maturity is $5. For a stock price of $110 and an interest rate of 6%, what value is closest to the corresponding call option with the same strike price and same expiration as the put option?

A) $11.99.

B) $12.74.

C) $15.00.

D) $17.87.


Your answer: B was incorrect. The correct answer was D) $17.87.

Call value = $110 + $5 � $100 / 1.060.5 = $17.87.


Just a quick question - why do we add the value of the put when determining the price of the call?

Thanks
 
I think the key word is 'corresponding'. Question is referring to put-call parity, hence

c = S + p - X/(1+r)^T
 
To add, you can't price the call independent of the put because of arbitrage due to put-call parity.
 
Call=Stock price+Put premium - Put strike price/(1+RFR)^(0.5 years)

This is straight from the call-put parity equation, but the logic behind it is a bit more complex.
 
newsuper Wrote:
-------------------------------------------------------
> Assume that the value of a put option with a
> strike price of $100 and six months remaining to
> maturity is $5. For a stock price of $110 and an
> interest rate of 6%, what value is closest to the
> corresponding call option with the same strike
> price and same expiration as the put option?
>
> A) $11.99.
>
> B) $12.74.
>
> C) $15.00.
>
> D) $17.87.
>
>
> Your answer: B was incorrect. The correct answer
> was D) $17.87.
>
> Call value = $110 + $5 � $100 / 1.060.5 = $17.87.
>
>
> Just a quick question - why do we add the value of
> the put when determining the price of the call?
>
> Thanks


C+x/(1+r)^T = S+P

In this case C = 115-110/(1.06^.5)
 
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