Which one of the following options is more expensive? Show all calculations
(a) A six-month put that carries a $40 strike price on a stock that is currently trading at $35.84, given that the put trades at a 15 percent investment premium; or
(b) A six-month call that carries a $50 strike price on a stock that currently trades at $54.75, while the call trades with a 12 percent investment premium.
What will be an ideal response?
Answer:
(a) Value of put = ($40.00 - $35.84) = $4.16
Price of put = [{(0.15)($4.16)} + $4.16] [100] = $478.40
(b) Value of call = ($54.75 - $50.00) = $4.75
Price of call = [{(0.12)($4.75)} + $4.75] [100] = $532.00
Therefore, the call is more expensive.
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