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

Concepts of working capital, CONCEPTS OF WORKING CAPITAL There are two ...

CONCEPTS OF WORKING CAPITAL There are two concepts of Working Capital - Net working capital and Gross Working capital. 1. Gross Working Capital Gross Working capital re

Define discounting the equity cash flow, Which of these two methods is bett...

Which of these two methods is better: discounting the Equity Cash Flow or discounting the Free Cash Flow? The results we get by discounting the Equity Cash Flow and the Free Ca

What is cash credit, Q. What is Cash Credit? A cash credit is an arrang...

Q. What is Cash Credit? A cash credit is an arrangement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities or guarantees

The authority and duties of shareholders, The authority and duties of membe...

The authority and duties of members (shareholders) Members and shareholders shall together and severally protect, conserve and actively exercise the supreme authority of the co

Corporate governance features, Corporate Governance features Corporat...

Corporate Governance features Corporate compliance: The BOD should make sure that corporation obeys with all related laws, governance practices, regulations, accounting an

Explain how price serve as a signal to resource owners, How does price serv...

How does price serve as a signal to resource owners? While consumers decide that a good or service is much more appealing than before, demand rises.  This makes a shortage at the

Which currency has used in an international acquisition, Which currency has...

Which currency has to be used in an international acquisition in order to calculate the flows? It can be completed in the local currency or in the currency of the parent compan

Difference euronote market and euro medium term note market, What is the di...

What is the difference between the Euronote market, the Euro-medium-term-note market, and the Eurocommercial paper market? Answer:  Euronotes are short-term notes guarantees by

Cash books, Cash Books (Cash Payments and Receipts Journals) Cash books...

Cash Books (Cash Payments and Receipts Journals) Cash books are the names given to the Cash Receipts Journal and the Cash Payments Journal. They are used to record the flow of

Charge for depreciation and amortization, Talbot Enterprises recently repor...

Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was i

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