You are given:

(i) Stock XYZ pays no dividends.

(ii) Derivative A gives its holder the right, but not the obligation, to buy an at-the-money European call option for $6 at the end of 6 months. The call option is on one share of stock XYZ and will mature one year from now.

(iii) The price of Derivative A is 2.5944.

(iv) Derivative B is identical to Derivative A, except that it gives its holder the right to sell the same call option in (ii) for $6 at the end of 6 months.

(v) The continuously compounded risk-free interest rate is positive.

(vi) The following prices of at-the-money European options on stock XYZ for various maturities:

Calculate the price of Derivative B.

Transcribed Image Text:

Type of Option Call Call Put Put Time to Expiration 6 months 1 year 6 months 1 year Price 4.2581 6.4225 2.7804 3.5107