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Question of the Week - Derivatives
You are interested in purchasing a 1-year call for Unic Technology at a strike price of $80. The stock is currently selling for $70; a 1-year put for Unic at $80 is worth $15. The risk-free interest rate is 3%, and the yield on Unic's 1-year senior bonds is 5%. The price of the call should be closest to:
Question of the Week - Derivatives 18 votes
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A synthetic call can be created with a long put, long stock, and short bond.
We are given:
Plug this into the synthetic call formula (derived from put-call parity):
C0 = P0 + S0 – X / (1 + r)^T
= 15 + 70 – 80 / (1 + 0.03)^1
= $7.33