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Current Stock Price - Calculating

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Assume that a stock will be worth either $20 or $10 one year from now. A one-year call option on the stock, with an exercise price of $15, is worth $3 today. A one-year put option on the stock, with an exercise price of $12, is worth $0.50 today. What is the current stock price?

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Solution Summary

This solution calculates the current price of a stock with a given future value, call-option and exercise price.

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Let p is the probability of stock reaching $20 and (1-P) is the probability of stock reaching $10. The risk free rate is r. Assume that the current stock price is S.
Then, we have
S = (20*p+10*(1-P))/(1+r) = 10(1+p)/(1+r)
First work for call option:
The ...

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