5. A put and call option are written on the same underlying stock and they are b

Question

5. A put and call option are written on the same underlying stock and they are both exactly at the money. Both are European options with the same expiration date, which is several months from now. The risk-free rate of interest is 1%. One of the following statements below is true. Which one, and why?

a. The market value of the call is greater than the market value of the put.

b. The market value of the put is greater than the market value of the call.

c. The market value of the call is equal to the market value of the put

d. You cannot say which option is more valuable without more information.

Explanation / Answer

The value of a call is maximum of either 0 or Price of the underlying stock - excercise price

The value of Put is maximum of either 0 or excercise price - price of underlying stock

When an oprion is at the money , means the excercise price = price of underlying asset

Which means maximum value is equal to zero in both cases- call and put

So, the market value of a call is equal to the market value of put.

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