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Answer: £6.79
The correct answer is **A (£6.79)**. This is derived using the put-call forward parity for European options, which states: ``` P₀ - C₀ = [X - F₀(T)](1 + r)^(-T) ``` Where: - **P₀** = Put option price = £4 - **X** = Exercise price = £47 - **F₀(T)** = Forward price = £50 - **r** = Risk-free rate = 10% - **T** = Time to maturity = 0.75 years Rearranging for **C₀** (call option price): ``` C₀ = P₀ - [X - F₀(T)](1 + r)^(-T) ``` Substituting the values: ``` C₀ = £4 - [£47 - £50](1.10)^(-0.75) = £6.79 ``` Option B (£7.22) is incorrect due to a miscalculation of the exponent, and Option C (£7.30) is incorrect as it omits the exponent entirely.
Author: LeetQuiz Editorial Team
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An investor holds a long position in a risk-free bond and a forward contract on a non-dividend-paying stock priced at £50. The annual risk-free rate is 10%. A nine-month put option on the stock with an exercise price of £47 trades at £4. The price of a nine-month call option on the stock with an exercise price of £47 is closest to:
A
£6.79
B
£7.22
C
£7.30
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