Topic: Put Call parity

Question:

II. Suppose you have the following information concerning a particular options.

Stock price, S = RM21

Exercise price, K = RM20

Interest rate, r = 0.08

Maturity, T = 180 days = 0.5

Standard deviation, o = 0.5

a. What is correct of the call options using Black-Scholes model? (5 marks)

b. Compute the put options price using Black-Scholes model. (5 marks)

III. Suppose a European put options has a price higher than that dictated by the put- call parity.

a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices you have computed in the previous question (II) above. (10 marks)

b. Name the options/stock strategy used to proof the put-call parity. (5 marks)

c. What would be the extent of your profit in (a) depend on? (5 marks)

II. Suppose you have the following information concerning a particular options. Stock price, s Exercise price, K Interest rate, Maturity, T = 180 days Standard deviation, a = RM 21 = RM 20 = 0.08 =0.5 = 0.5 a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model. (5 marks) (5 marks) III Suppose a European put options has a price higher than that dictated by the put- call parity a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices you have computed in the previous question (1) above. (10 marks) b. Name the options/stock strategy used to proof the put-call parity. (5 marks) c. What would be the extent of your profit in (a) depend on