### 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.)

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.)

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