Unformatted text preview: Equalize the range to find the number of shares of stock: Option range / Stock range = $5/$10 = 0.5. With 0.5 shares, the stock’s payoff will be either $13.5 or $8.5. The portfolio’s payoff will be $13.5 - $5 = $8.5, or $8.5 - 0 = $8.5. The present value of $8.5 at the risk-free rate is: PV = $8.5 / (1.06) = $8.02 The option price is the current value of the stock in the portfolio minus the PV of the payoff: C = 0.5($22) - $8.02 = $2.98 17. The current price of a stock is $50 and the annual risk-free rate is 6 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $7.20. Using the concept of put-call parity, determine the value of a put option written...
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- Spring '08
- Options, annual risk-free rate