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Answer: $17.60
The correct answer is **C**. By put-call parity for a non-dividend-paying stock: \[ S_0 + p = c + Ke^{-rT} \] Rearrange to get the covered call value: \[ S_0 - c = Ke^{-rT} - p \] Substituting the values: - \(S_0 = 20\) - \(p = 2\) - \(K = 20\) - \(r = 4\%\) - \(T = 0.5\) \[ S_0 - c = 20e^{-0.04\times0.5} - 2 \approx 19.60 - 2 = 17.60 \] So the total initial cost to write a covered call is **$17.60**.
Author: Manit Arora
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Q-183.6. The current price of a non-dividend-paying stock is $20.00 and the price of a six-month European put option on the stock with a strike price of $20.00 (ATM) is $2.00. The riskfree rate is 4.0%. What is the total initial cost to write a covered call if we assume the trade includes a six-month ATM call?
A
$2.00
B
$12.40
C
$17.60
D
$22.00
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