### European Call and Put Option Pricing**Problem Statement:**The European call option on Asset Q that expires in one year has a strike price of $32 and an option price of $4. The forward price of Asset Q in one year is $36. The annual continuously compounded interest rate is 0.08. Find the price of the put option on Asset Q with a strike price of $32.**Explanation:**In this problem, you are given:1. **European Call Option:** - **Strike Price**: $32 - **Option Price**: $42. **Asset Q:** - **Forward Price in one year**: $363. **Interest Rate:** - **Annual Continuously Compounded Interest Rate**: 0.08Using the given information, calculate the price of the put option on Asset Q with a strike price of $32. To find the price of the put option, you may use the Put-Call Parity for European options, which is expressed as:\[ C - P = S_0 - Ke^{-rt} \]Where:- $ C $ is the call option price,- $ P $ is the put option price,- $ S_0 $ is the current price of the asset,- $ K $ is the strike price,- $ r $ is the continuously compounded risk-free interest rate,- $ t $ is the time to expiration in years.Given values can be substituted into the formula to find the required put option price.

The question is based on the concept of Put-Call parity. Put call parity is a principle that…

5. The European call option on Asset Q that expires in one year has strike price $32 and option price $4. The forward price of Asset Q in one year is $36. The annual continuously compounded interest rate is 0.08. Find the price of the put option on Asset Q with strike price of $32.

5. The European call option on Asset Q that expires in one year has strike price $32 and option price $4. The forward price of Asset Q in one year is $36. The annual continuously compounded interest rate is 0.08. Find the price of the put option on Asset Q with strike price of $32.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume the spot Swiss franc is $0.7085 and the six-month forward rate is $0.7120. What is the Value of a six-month call and a put option with a strike price of $0.6885 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option.
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