Q:

ABC shares are currently trading at $27.00, and they are expected to pay a dividend of $0.50 in 6 month's time. The 6- month put option on ABC shares with an exercise price of $25.00 is currently trading at $1.50. If the risk-free rate is 8%, what should be the value of a 6-month call option on ABC shares with an exercise price of $25.00?
a) $2.82
b) $2.00
c) $2.87
d) $3.96

A:
The correct answer is d)
According to Put-Call Parity:
(Stock Price) + (Put) - (Call) = PV(X) + PV(D)
27.00 + 1.50 - c = [(25)/(1.08)0.5] + [(0.50)/(1.08)0.5]
28.50 - c = 24.06 + 0.48
           c = $3.96

MORE FAQS

  1. If ABC Company had the following Income Statement figures, what is the Operating Margin of ABC Company

  2. If ABC corporation, which is listed on the New York Stock Exchange ...

  3. The real rate of return is the amount of interest earned over and above the:

  4. How is the Put-Call Ratio calculated and where does the information come from?

  5. Where can traders and investors find most recent Put-Call indicator ratios and charts?

  6. Why is the Put-Call Ratio important for investors and economists for tracking market sentiment?

  7. A Straddle

  8. Clark recently purchased shares in ABC mutual fund with some funds from the sale of his home ...

  9. How risky is a covered call?

  10. When is a call option considered to be "in the money"?

  11. What is the put-call ratio and why should I pay attention to it?

  12. A “normal market” is also called a (an): A) Inverted market b) Carrying charge market c) Premium market ...

  13. A portfolio hedge is purchased in the form of a spread ...

  14. A portfolio hedge is purchased in the form of a spread ...

  15. How are a mutual fund's C shares different from A and B shares?

  16. Compute the offering price for a mutual fund with NAV of $1,200,000,000, an 8% front-end load, and 1,000,000 shares outstanding.

  17. What's the smallest number of shares I can buy?

  18. Which of the following is not a reason why a company might issue a stock dividend ...

  19. You invest $1,000 in a mutual fund for two years. The mutual fund earned 25% in the first year and lost ...

  20. How do you use put options to profit from a bear market?

RELATED FAQS

  1. If ABC Company had the following Income Statement figures, what is the Operating ...

    The correct answer is c): The operating margin is a very useful test of the efficiency of corporate management. Operating ...
  2. If ABC corporation, which is listed on the New York Stock Exchange ...

    The correct answer is d). This transaction would qualify under two different exemptions – the first because it is an exchange ...
  3. The real rate of return is the amount of interest earned over and above the:

    a. discount rate. b. tax rate. c. inflation rate. d. risk-free rate of return. Answer: C Since the real rate of return measures ...
  4. How is the Put-Call Ratio calculated and where does the information come from?

    Discover how major exchanges and financial websites, such as the Chicago Board of Exchange, compile data for their respective ...
  5. Where can traders and investors find most recent Put-Call indicator ratios and charts?

    Learn about how the put-call ratio is calculated and interpreted, and discover where traders and analysts can obtain current ...
  6. Why is the Put-Call Ratio important for investors and economists for tracking market ...

    Discover why the put-call ratio is considered a useful measure for investors and economists when they are determining market ...
RELATED TERMS
  1. Put

    An option contract giving the owner the right, but not the obligation, ...
  2. Put-Call Parity

    A principle that defines the relationship between the price of ...
  3. Put-Call Ratio

    A ratio of the trading volume of put options to call options. ...
  4. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  5. C Corporation

    A legal structure that businesses can choose to organize themselves ...
  6. Aggregate Exercise Price

    The strike price of a put or call option multiplied by its contract ...

You May Also Like

Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center