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Acme Stock Options Problem

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Acme stock is trading at $120 per share, and the company will not pay any dividends over the next year. Consider an Acme European call option and a European put option, both having an exercise price of $124 and both maturing in exactly one year. The simple (annualized) interest rate for borrowing and lending between now and one year from now is 3% for each 6 month period (6.09% per year).

Assume that there are no arbitrage opportunities. Is there enough information to determine which option has the higher market value? If so, which option, the call or the put, has higher market value?

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Solution Summary

Comparison of Acme European call option and European put option.

Solution Preview

Yes there is enough information. Let's consider price difference between a call and a put. This price difference is the same ...

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Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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