Suppose shares of stock in Smolira Corp. are selling for $110. A call option on Smolira with

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Suppose shares of stock in Smolira Corp. are selling for $110. A call option on Smolira with one year to maturity and a $110 strike price sells for $15. A put with the same terms sells for $5. What’s the risk-free rate?

To answer, we need to use put-call parity to determine the price of a risk-free, zero coupon bond:

Price of underlying stock + Price of put − Price of call = Present value of exercise price Plugging in the numbers, we get:

$110 + 5 − 15 = $100 Because the present value of the $110 strike price is $100, the implied risk-free rate is 10 percent.

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Related Book For answer-question

Corporate Finance

ISBN: 9781265533199

13th International Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

Question Posted: Nov 22, 2023 03:31 AM

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Suppose shares of stock in Smolira Corp. are selling for $110. A call option on Smolira with

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The implied riskfree rate is 10 Putcall parity is a relationship be...View the full answer

Corporate Finance

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