Question

Intel Corp has a share price of $31.63 and a yearly dividend of $1.50 per year. An option with a strike price of $27 has a call price of $6.10, and a put price of $2.65. It has a 1 yr expiry period. Assuming no interest, what is the predicted share price according to the put-call parity relationship?

Answer 1

Put Call Parity defines a price relationship between a call option, put option and the underlying stock.

The basic put-call parity formula along with dividends is as given below:

P₀+ S₀= C₀+(D+X*e^-r*t)

Where P₀ and C₀ are the put option and call option premium

X is the strike price

S₀ is the stock price today

t is the time to expiration

r is the risk free rate which is 0 in this case

thus solving for Stock price S₀

S₀ = C₀ + D + X - P₀

= 6.1+1.5+27-2.65

=31.95

Thus the predicted share price according to put-call parity is $31.95.

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Now you can see that the actual share price( $ 31.63) is very close to the predicted share price by the put-call parity formula!!