The Common Stock Of The Putt Corporation Has Been

Question

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the pas…

The common stock of the P.U.T.T. Corporation has been trading in
a narrow price range for the past month, and you are convinced it
is going to break far out of that range in the next 3 months. You
do not know whether it will go up or down, however. The current
price of the stock is $155 per share, and the price of a 3-month
call option at an exercise price of $155 is $5.40.

a. If the risk-free interest rate is 8% per
year, what must be the price of a 3-month put option on P.U.T.T.
stock at an exercise price of $155? (The stock pays no dividends.)
(Do not round intermediate
calculations.
Round your answer to 2 decimal
places.)

Put-call parity?

b. A straddle would be a simple options
strategy to exploit your conviction about the stock price’s future
movements. How far would it have to move in either direction for
you to make a profit on your initial investment? (Round
your intermediate calculations
and final answer to
2 decimal places.)

Total cost of the straddle?

Solutions

Expert Solution

1.
Using put call parity
P=C+X/(1+r)^t-S
=5.40+155/1.08^(3/12)-155=2.4463

2.
Total cost of the straddle=2.4463+5.40=7.8463


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