The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option? Select one: a. $7.33 b. $7.71 c. $8.12 d. $8.55 e. $9.00

The value of the put option is;

e. $9.00

Explanation:

To determine the value of the put option can be expressed as;

C (t) - P (t) = S (t) - K. e^ (-rt)

where;

C (t) = value of the call at time t

P (t) = value of the put at time t

S (t) = current price of the stock

K=strike price

r=annual risk free rate

t=duration of call option

In our case;

C (t) = $7.2

P (t) = unknown

S (t) = $50

K=$55

r=6%=6/100=0.06

t=1 year

replacing;

7.2-P=50-55*e^ (-0.06*1)

7.2-P=50 - (55*0.942)

7.2-P=50-51.797

P=51.797+7.2-50

P=$8.997 rounded off to 2 decimal places=$9.00