7. A four month (120 day) call option on a certain stock has an exercise (strike

Question

7. A four month (120 day) call option on a certain stock has an exercise (strike) price of $62 and is currently selling for $10. If the corresponding put option for this same stock (with the same $62 strike price and four month expiration length) is selling for $15.40, what is the underlying stock’s current market price? Use the put/call parity model to determine your answer. (Assume the current risk-free rate is 4%, and that the stock pays no dividends.)

PLEASE solve without the use of excel and show steps. The answer is $55.78 but I need to know how to solve it. Thanks.

Explanation / Answer

We have following Put Call parity:

C + PV (X) = P +S

10 + 62/(1+0.04)^(4/12) = 15.40 + S

10 +61.195 = 15.40 + S

S = 71.195 -15.40

S= 55.80

Therefore, current stock price would be 55.80.

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