Explanation:
We can rearrange the put-call parity relationship to calculate the exercise price: PV(X) = S + p − c. Plugging in the information, we have: PV(X) = $66 + $2.80 − $5.60 = $63.20. We know that the risk-free rate is 5% and we are dealing with 3-month options: X/(1.05)^0.25 = $63.20, so X = $64.
(Book 3, Module 39.2, LO 39.c)
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Question 5
An equity portfolio manager uses call and put options combined with long stock positions with the goal of outperforming the S&P 500 with less risk. He is in the process of compiling an option chain on a stock with the ticker symbol KKKU. The option chain provides him with a list of call and put prices at various strike prices; however, when he prints his report, it does not show the exercise price for any of the options. He knows the current risk-free rate is 5% and the current price of KKKU stock is $66. He also knows that the price of a 3-month put option on KKKU stock is $2.80 and the price of a 3-month call at the same strike price is $5.60. What is the exercise price of the options that the portfolio manager is analyzing?
A
$61.
B
$62.
C
$63.
D
$64.
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