Question

A stock price is currently $40. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest is 5% continuous compounding per annum. Calculate the value of a three-month European call option on the stock with an exercise price of $40. Use risk-neutral valuation. Find the value of a European put option with the same terms by put-call parity.

Answer 1