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

Explain the determinants of operating exposure, Explain the determinants of...

Explain the determinants of operating exposure. Answer:  The main determinants of a company’s operating exposure are (a) The structure of the markets where the company sourc

Explain how bank eliminate the currency exposure, Banks find it essential t...

Banks find it essential to accommodate their client’s requirements to buy or sell foreign exchange forward, in many examples for hedging purposes.  How can the bank eliminate the c

Find out wacc, Directions: Use the information below to calculate the WACC...

Directions: Use the information below to calculate the WACC and its components for Hawk Corp. WACC= (%CE)(cost of CE) + (%PE)(cost of PE) + (%D)(cost of D)(1-T)

Operating cycle, discuss the applicability of an operating cycle of a veget...

discuss the applicability of an operating cycle of a vegetable growing business

Explain the compound interest, What is compound interest? Compare compound ...

What is compound interest? Compare compound interest to discounting. Compound interest takes place while interest is earned on interest and on the original principal of an invest

Portfolio duration, We can measure the portfolio duration by calculat...

We can measure the portfolio duration by calculating the weighted average of the duration of the bonds in the portfolio. The proportion of the portfolio that a se

Illustrate the steps of creative accounting, Illustrate the steps of Creati...

Illustrate the steps of Creative accounting Creative accounting include: 1 Timing of transactions. Delaying or hurrying up the despatch of invoices at the yearend to decr

Describe historical cost and future costs, Q. Describe Historical cost and ...

Q. Describe Historical cost and future costs? Historical cost and future costs: another problem in the determine of cost of the capital arise on the accounts of the difference

Calculate the interest value , 1. Suppose a firm's tax rate is 35%. What af...

1. Suppose a firm's tax rate is 35%. What affect would a $10 million operating expense have on this year's earnings?  What effect would it have on next year's earnings? 2. What

Obtain a market arbitrage position, (a) One could obtain a market arbitrag...

(a) One could obtain a market arbitrage position as follows: buy Honeywell shares as well as sell General Electric shares. If the merger gets place the Honeywell shares will conve

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