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From the following information March 31 of a particular year for a group of JUNE 350...

  1. From the following information March 31 of a particular year for a group of JUNE 350 options on futures contracts to answer the following. Futures price: 350.20 Expiration: June20 Risk-free rate: 0.0384 percent Call price: 7.65 Put price: 4.50

a. Determine the intrinsic value of the call. Show work and briefly discuss.

b. Determine the time value of the call. Show work and briefly discuss.

c. Determine the lower bound of the call. Show work and briefly discuss.

d. Determine the intrinsic value of the put. Show work and briefly discuss.

e. Determine the time value of the put. Show work and briefly discuss.

f. Determine the lower bound of the put. Show work and briefly discuss.

g. Determine whether put–call parity holds. Why?  Show work and briefly discuss.

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Answer #1

a. Futures price = $350.20

Call price = $7.65

Strike price = $350

Futures price > Strike price, so the call option is in the money.

Intrinsic value = Futures price - strike price

Intrinsic value = 350.20 - 350 = $0.20

b. Time value = Option price - Intrinsic value

Time value = 7.65 - 0.20

Time value = $7.45

c. Lower bound of the call option = 350.20 - 350/(1 + 0.0384)^(3/12)

Lower bound of the call option = $3.4816122604

d. The intrinsic value of the put option is zero because the put option is out of the money (The futures price > the strike price)

e. For an out of the money put option, the time value = put option price

The time value = $4.50

Can you please upvote? Thank You :-)

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