Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year maturity sells for $7. If the annual interest rate is 5%, what must be the price of a 1-year at-the-money European call option on the stock?

$9.86

Explanation:

Calculation for the call option on the stock

Call option=$100−($100/1.05)−($2/1.05)+$7

Call option=$100−$95.238−$1.91+$7

Call option= $9.86

Therefore what must be the price of a 1-year at-the-money European call option on the stock is $9.86

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