Question
Exercise 6A To find the put premium using the put-call parity From the slide Stock index option-continuous compounding Stock index = 4500 (So), with dividend
Exercise 6A
To find the put premium using the put-call parity
From the slide
Stock index option-continuous compounding
Stock index = 4500 (So), with dividend yield =4% per annum (q)
Risk free rate = 3% per annum (r)
3-month (T= 0.25) European call option on the index:
Strike = 4450 (K), call premium = $120 (c)
Find price (p) of a 3-month index put option with strike 4450.
Look ppt slide on single share, this instrument is a Stock index, continuous compounding.
First, list all the assumptions of put call parity.
European
Same strike
Same maturity (call date and put date)
Same asset
Second, do the calculation
Continuous compounding
Remember q,r,T all in years
Exercise 6B
Relative volatility of an asset class index to volatility of a single asset.
Asset class- shares, bonds, properties, commodities etc
Index - represent the movement of all assets in the class
Single asset - referring to one share only
Example of asset class index and single asset:
Asset class indices
Single share
E.g Toyota
Exercise 6C
Protective put for share portfolio insurance; effect of a higher beta value on insurance cost (put premium)
Buy a protective put in the form of insurance
Higher beta higher risk
The put premium will be higher
Go Research provide two reasons why it is higher.
1
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