Use put-call parity to verify the call and put option prices

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A) You try to price the options on XYZ Corp. The current stock price of XYZ is $100/share. The risk-free rate is 5%. You project the stock price of XYZ will either be $90 or $120 in a year. Assume you can borrow or lend money at the risk-free rate. Use risk-neutral approach to price the 1-year call option on XYZ Corp with the strike price of $105. (Attention: using a wrong approach will cost you all the credits)

B) You try to price the options on XYZ Corp. The current stock price of XYZ is $100/share. The risk-free rate is 5%. You project the stock price of XYZ will either be $90 or $120 in a year. Assume you can borrow or lend money at the risk-free rate. Use risk-free portfolio approach to price the 1-year put option on XYZ Corp with the strike price of $105. (Attention: using a wrong approach will cost you all the credits)

C) Use put-call parity to verify the call and put option prices you just calculated in A and B.

Reference no: EM132064096

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