Problem 20:2

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 3 months. You do not know whether it will go up or down, however. The current price of the stock is $140 per share, and the price of a 3-month call option at an exercise price of $140 is $10.75.

a.	If the risk-free interest rate is 5% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $140? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Put-call parity

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b.	What would be a simple options strategy to exploit your conviction about the stock price