Question

A call and a put are held in a portfolio, both have an exercise price of...

A call and a put are held in a portfolio, both have an exercise price of $140

Premium for the call is $5.00

Spot price of the stock is $145, and the risk free rate is 4%.

A. Using continuous compounding, what is the Premium of the Put if both options expire in 2.5 years?

B. Using monthly compounding, what is the Premium of the Put if both options expire in 2.5years?

C. Does the Put-Call Parity equation work when considering calls and puts having different exercise prices?

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Answer #1

A.

We can compute the Put premium using Put-Call parity equation (with continuous compounding):

where,

P = Put premium

C = Call premium

X = Exercise price

r = risk free rate

t = maturity

B.

We can compute the Put premium using Put-Call parity equation (with monthly compounding):

where,

P = Put premium

C = Call premium

X = Exercise price

r = risk free rate

t = maturity

C.

No, Put-Call parity shows the relationship between price of call option and put option with the same underlying asset, exercise price and maturity.

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