A stock sells for $125. A call option on the stock has an exercise price of $110 and expires in 3 months. If the interest rate is 0.15 and the standard deviation of the stock’s return is 0.30. What...

1. 
   

   A stock sells for $125. A call option on the stock has an exercise price of $110 and expires in 3 months. If the interest rate is 0.15 and the standard deviation of the stock’s return is 0.30.

   
   

   What would be the price of a put option on the same stock with an exercise price of $140 and the same time (3 months) until expiration? Show all workings. (See Appendix for the Cumulative Normal Distribution Table)

   
   

   
   



2. 
   

   b)  Let the spot rate be Yen 100 / $ and the 3-month forward rate be Yen 99/$. Compute the interest rate differential between the U.S. and Japan at which interest rate parity will hold true.

   
   

Extracted text: N(d) N(d) N(d) N(d) N(d) N(d) -3.00 .0013 -1.58 .0571 -.76 2236 .06 .5239 .86 .8051 .9515 1.66 -2.95 .0016 -1.56 .0594 -.74 2297 .08 .5319 .88 .8106 1.68 .9535 -2.90 .0019 -1.54 .0618 -.72 2358 .10 .5398 .90 .8159 1.70 .9554 -2.85 .0022 -1.52 .0643 -.70 2420 .12 .5478 .92 .8212 1.72 .9573 -2.80 .0026 -1.50 .0668 -68 .2483 .14 .5557 .94 .8264 1.74 .9591 -2.75 0030 -1.48 .0694 -.66 .2546 .16 .5636 .96 .8315 1.76 .9608 -2.70 0035 -1.46 .0721 -.64 .2611 18 .5714 .98 .8365 1.78 .9625 -2.65 .0040 -1.44 .0749 -.62 .2676 20 .5793 1.00 .8413 1.80 .9641 2.60 0047 -1.42 .0778 -.60 2743 .22 .5871 1.02 .8461 1.82 .9656 -2.55 0054 -1.40 .0808 -58 .2810 24 .5948 1.04 .8508 1.84 .9671 2.50- .0062 -1.38 .0838 -.56 .2877 .26 .6026 1.06 .8554 1.86 .9686 -2.45 0071 -1.36 .0869 -.54 .2946 .28 .6103 1.08 .8599 1.88 -2.40 0082 -1.34 .9699 .0901 -52 .3015 .30 6179 -2.35 0094 1.10 8643 1.90 .9713 -1.32 .0934 -.50 3085 32 6255 -2.30 .0107 1.12 .8686 1.92 .9726 -1.30 .0968 -48 .3156 34 6331 2.25 .0122 1.14 .8729 1.94 .9738 -1.28 .1003 -46 3228 36 6406 -2.20 .0139 1.16 .8770 1.96 .9750 -1.26 .1038 -44 .3300 38 6480 -2.15 .0158 1.18 8810 1.98 .9761 -1.24 1075 -42 3372 -2.10 .40 6554 1.20 8849 2.00 .0179 -1.22 1112 -.40 3446 .9772 -2.05 42 6628 1.22 .8888 2.05 .0202 -1.20 .1151 38 ,9798 3520 44 6700 1.24 8925 -2.00 .0228 -1.18 1190 +36 3594 2.10 9821 -1.98 46 6772 1.26 8962 2.15 .0239 -1.16 1230 .9842 -.34 3669 48 6844 -1.96 .0250 -1.14 1.28 .8997 2.20 .9861 1271 32 3745 50 -1.94 .0262 6915 1.30 .9032 2.25 .9878 1.12 1314 30 3821 -1.92 .0274 .52 .6985 1.32 .9066 2.30 -1.10 .1357 28 3897 .9893 -1.90 .0287 .54 7054 1.34 .9099 2.35 1.08 1401 26 3974 .9906 -1.88 .0301 .56 7123 1.36 .9131 -1.06 1446 .24 2.40 .9918 1.86 .4052 .58 .7190 1.38 .0314 -1.04 1492 .9162 2.45 .9929 -.22 .4129 .60 .7257 -1.84 .0329 -1.02 1.40 .9192 2.50 .9938 1539 -20 .4207 -1.82 .0344 .62 .7324 1.42 .9222 -1.00 .1587 18 .4286 2.55 .9946 -1.80 .0359 .64 .7389 1.44 .9251 -.98 .1635 -.16 .4364 2.60 .9953 -1.78 .0375 .66 .7454 1.46 .9279 .96 .1685 -.14 .4443 2.65 .9960 -1.76 .0392 .68 .7518 1.48 .9306 -.94 .1736 -12 2.70 .9965 -1.74 .0409 .4522 .70 .7580 1.50 -.92 .1788 -.10 .9332 2.75 .9970 -1.72 .0427 .4602 .72 .7642 -.90 .1841 -.08 1.52 .9357 2.80 .4681 .74 .9974 -1.70 .0446 -88 .7704 1.54 .9382 .1894 -.06 .4761 .76 2.85 .9978 -1.68 .0465 -.86 .7764 1.56 .9406 .1949 -.04 .4840 2.90 .9981 -1.66 .0485 -.84 .78 .7823 1.58 .9429 2005 -.02 .4920 2.95 .9984 -1.64 .0505 -.82 2061 .80 .7881 1.60 .9452 -1.62 .00 .5000 3.00 .9987 .0526 -.80 .82 .7939 1.62 .9474 -1.60 2119 .02 .5080 3.05 .9989 .0548 -.78 2177 .84 .7995 1.64 .9495 .04 This table shows the probability [N(d)) of observing a value less than or equal to d. For example, as ilustrated .5160