Call option with the same exercise prices and maturity

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Reference no: EM132029371

You are observing the following prices. A put option that expires in six months has an exercise price of $45 and it sells for $5.80. The stock is currently priced at $40, and the risk-free rate is 3.6% per year, compounded continuously.

1. What is the price of a call option with the same exercise prices and maturity? USE CONTINOUS COMPOUNDING

2. Suppose you form a portfolio consisting of buying the call and the put options above (Note, they are written on the same stock having the same maturity). The resulting portfolio is known in the market as a “long straddle”. Is this portfolio risk free (perfectly hedged)? NEED DETAILED EXPLANATION AND CALCULATIONS.

Reference no: EM132029371

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