A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $2.06, you believe the puts are undervalued.
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Calculate the stock's standard deviation in dollars: Standard deviation = Stock price * Standard deviation percentage Standard deviation = $65 * 0.30 = $19.50 Show more…
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