Call-put parity, Financial Management

Assignment Help:

Call-Put Parity

P + S = C + E * [1/(1+i)] ^n     where:

 
   P = the market price of the put
   S = the market price of the stock
   C = the market price of the call
   E = the exercise price of both the call and the put
   i = the risk free rate ( taken as 5.5 %)
   n = the number of years until the expiration date of the options

 

Thus, if P + S > C + E * [1/(1+i)] ^n, you should buy calls because their value must increase for the equation to balance. 

On the other hand if P + S < C + E * [1/(1+i)] ^n, you should buy puts.

For Example -

For the March series, we find Call Option should be purchased for strike prices of Rs. 720 and 740.

 

Strike Price

Difference

720

18.19

740

5.74

 

For the March series, we find Put Option should be purchased for strike prices of Rs. 760, 780, 800, 820, 840, 860, 880 and 900.

 

Strike Price

Difference

760

15.3

780

4.25

800

4.89

820

2.1

840

3.79

860

4.84

880

9.79

900

32.64


Related Discussions:- Call-put parity

Capital budgeting case study, RWE Enterprises is a small manufacturer in Ad...

RWE Enterprises is a small manufacturer in Adelaide South Australia, feed suppliments for cattle. New production line NPV, Payback period and discounted payback period

What is planning, What is Planning Internal auditors must plan the audi...

What is Planning Internal auditors must plan the audit work so as to perform the audit in an effective manner.There must be sufficient audit programmes in existence which set o

Partial correlation coefficients , In multiple correlation equations we are...

In multiple correlation equations we are often interested in finding out how much of the variation in the dependent variable is explained by one independent variable if all the oth

State the term- financing decision, State the term- Financing Decision ...

State the term- Financing Decision The second financial decision is financing decision,which essentially addresses two questions: a. How much capital must be raised to fu

Coverage ratio, Coverage ratios give the relationship between the financial...

Coverage ratios give the relationship between the financial charges of a firm and its ability to service them. The four most commonly used coverage ratios are:

Standard communication protocol used for the internet, Question: (a) W...

Question: (a) What is a computer virus? List and explain the different type of computer viruses? (b) List 4 steps which you can use to minimize the chances of being infec

Is book value the best proxy to the value of the shares, Is book value the ...

Is book value the best proxy to the value of the shares? No. According to A6 it would be a miracle if the number that appears in the Shareholders' Equity had anything to do wit

Explain the term present value of the firm’s operations, Explain the term “...

Explain the term “present value of the firm’s operations” (also known as Enterprise Value).  What does this number represent? The present value of the free cash flows of the comp

Yield spread strategies, Bond market can be classified into various s...

Bond market can be classified into various segments based on the nature of characteristics such as type of issuer (central bank, corporate etc.), credit risk (ris

Explain in-quote-driven according to trade intermediation, Explain about th...

Explain about the in-quote-driven according to trade intermediation. In quote-driven dealer markets, a market-maker or dealer is onto one side of each trade. (Remember that dea

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd