Call option with the same exercise prices and maturity

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Reference no: EM13768011

You are observing the following prices. A put option that expires in six months has an exercise price of $45 and it sells for $5.80. The stock is currently priced at $40, and the risk-free rate is 3.6% per year, compounded continuously.

A) What is the price of a call option with the same exercise prices and maturity?

B) In the above example, suppose you form a portfolio consisting of buying a call and a put option on the same stock having the same maturity (known in the market as a long straddle). Is this portfolio risk free (perfectly hedged)?

Reference no: EM13768011

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