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17. A European call and a European put on a stock have the same strike price and time to maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01am news reaches the market that has no effect on the stock price or interest rates, but increases volatilities. As a result the price of the call changes to $4.50. Which of the following is correct?

A.The put price increases to $6.00

B.The put price decreases to $2.00

C.The put price increases to $5.50

D.It is possible that there is no effect on the put price

A.The put price increases to $6.00

B.The put price decreases to $2.00

C.The put price increases to $5.50

D.It is possible that there is no effect on the put price

Answer: C

The price of the call has increased by $1.50. From put-call parity the price of the put must increase by the same amount. Hence the put price will become 4.00 +1.50 = $5.50.

The price of the call has increased by $1.50. From put-call parity the price of the put must increase by the same amount. Hence the put price will become 4.00 +1.50 = $5.50.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015