Option Pricing Question

[albertddd]

In my finance book I have the following question

T-bills currently yield 5.5 percent. Stock in Maria's Manufacturing is currently selling for $70 per share.

There is no possibility that the stock will be worth less than $65/share in one year.

What is the value of a call option with a $60 exercise price?

The answer book is: C0=70–[60/1.055] = 13.13. I don't understand how the option price was found like this. We don't know the volatility for the stock, so how is it possible to calculate the option price. Does it have something to do with the fact that the option will definitely be exercised?

Thanks a lot for your help.

 

[Keith Tan]

there are many ways to price options. put-call parity is one of them. 60/1.055 is the present value of your asset if you get to exercise and pay at 60. in risk-neutral sense, whether you buy the stock now or own the stock later through the call option, it is worth 70 today.

 

[albertddd]

Does this only work because the stock will never trade at less than $65, or does it work regardless. If it depends on the $65, could you explain why?

 

[albertddd]

Ohh never mind. I understand. Thanks a lot!