Arley Merchandise Corp from HBS CASE

1. Assuming Arley's common stock would sell at $6.5 per share in the public market, is the proposed "money-back guarantee" likely to have sufficient value to bridge the $1.5 gap noted in the case? (Note: In October 1984, the two-year Treasury rate was about 11% per annum. The price volatility of publicly traded common stocks similar to Arley was estimated at a standard deviation of 40% per annum.). First, calculate the price of the put option using the B-S formula. Then, calculate the price again using the Put-Call parity relation. Explain the difference.