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

Prepare monetary statements using accounting standards, Entity A is signifi...

Entity A is significantly smaller than B in terms of revenue and would not impact LOP's revenue to the same extent. However A earns a noticeably better gross profit margin at 26% a

Bond derivatives-callable bonds , Callable bonds give the right...

Callable bonds give the right to the issuer to redeem the bond prior to its maturity date, at a specified call price. These bonds are beneficial to the

What is the market risk premium in spain at the present, What is the market...

What is the market risk premium in Spain at the present moment - the number which I have to use in the valuations? It is not possible to talk of "the" market premium for Spain.

Which type of financing is appropriate to firm, This case provides the oppo...

This case provides the opportunity to match financing alternatives with the needs of different companies. It allows the reader to demonstrate a familiarity with different types of

Tests in investments, Tests in Investments There are many rules that sp...

Tests in Investments There are many rules that specify how the past data of share prices can be used to obtain a clue regarding the future prices of shares. Such rules would be

Gathering competitive intelligence information, K is a kitchen and bathroom...

K is a kitchen and bathroom design and installation company which currently has showrooms in one region only of Country T. The company has enjoyed considerable success since it was

The mechanism of a swap in risk management, QUESTION i) Discuss the ris...

QUESTION i) Discuss the risk associated with changes in exchange rates. ii) How can these risks be managed internally? iii) Explain how a manager can use a forward contra

UMMB, what is the benefits of UMMB

what is the benefits of UMMB

Types of dividend policy, TYPES OF DIVIDEND POLICY 1. Regular dividen...

TYPES OF DIVIDEND POLICY 1. Regular dividend policy: Payment of dividend at standard rate is known as regular dividend policy. 2. Stable dividend policy: Payment of fix

Explain the internalization theory of fdi, Normal 0 false fal...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

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