CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
A European call on a non-dividend-paying stock trades at 6.00. The stock price is 100, the put and call share a strike of 105 and a one-year expiry, and the annual risk-free rate is 5% (annual compounding). Using put-call parity, the price of the European put is closest to:
The put is worth about 6.00. Put-call parity gives p = c + PV(X) - S. The present value of the 105 strike is 100, so p = 6 + 100 - 100 = 6.00. Forgetting to discount the strike would wrongly give 11.00.
- A5.00
- B6.00Correct
- C11.00
Explanation
p = c + X/(1+r)^T - S = 6 + 105/1.05 - 100 = 6 + 100 - 100 = 6.00. Omitting discounting gives 6 + 105 - 100 = 11.00. A wrong sign on the call gives 5.00 less a mistaken adjustment.
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