QUESTION 4.

a. Consider two "corresponding" options, consisting of a call and a put with the exact same parameter values. For this pair, the call premium is $8.5. If the current price of the underlying asset is $85 and the present value of the exercise price is $85, what is the premium of the put option, P? Write the answer with one decimal; e.g., 3.2. Do NOT use the $ symbol in your answer; just write a numerical value.

b. Consider two "corresponding" options, consisting of a call and a put with the exact same parameter values. For this pair, the current price of the underlying asset is $82, the options have an exercise price of $86 and they expire in 10 months. Additionally, the risk-free rate is 5% p.a. What is the difference between the premium of the put option, P, and the premium of the call option, C; that is, what is the value of P - C? Write the answer with two decimals; e.g., 3.24. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive. NOTE: Use the continuous time version of the Put-Call Parity equation (i.e., do NOT use the book's version).