The stock of Iowa Actuarial Corporation has been trading in a narrow range around its current price
Question:
The stock of Iowa Actuarial Corporation has been trading in a narrow range around its current price of 45 per share for months. Dividends of 2 are payable quarterly, with the first dividend payable one month from now. The continuously compounded risk-free rate of interest is 6%.
You are convinced that the stock price will remain in a narrow range around 45 over the next three months. To take advantage of your belief, you speculate on the volatility of the stock through an appropriate position in a 3-month 45-strike straddle.
It turns out that you realize a loss (i.e., your profit is negative) if the 3-month stock price moves by more than 8.52 in either direction from its current level of 45.
Calculate the price of a 3-month 45-strike put option.
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