# bff5040tute-8answer - BKMCh 20 Q7 a Put-call parity P = C...

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BKMCh 20: Q7 a. Put-call parity: P = C – S 0 + [X/(1 + r f ) T ] = 10 – 100 + [100/(1.1) 1/4 ] = \$7.65 b. Purchase a straddle, i.e., both a put and a call on the stock. The total cost of the straddle is: \$10 + \$7.65 = \$17.65. This is the amount by which the stock would have to move in either direction for the profit on the call or put to cover the investment cost (not including time value of money considerations). Accounting for time value, the stock price would have to move in either direction by: \$17.65 x1.1 1/4 = \$18.08 BKMCh 20: Q8 a. Put-call parity: C = P + S 0 – [X/(l + r f ) T ] = 4 + 50 – [50/(1.1) 1/4 ] = \$5.18 b. Sell a straddle: \$5.18 + \$4 = \$9.18. If the stock ends up at \$50, both of the options will be worthless and your profit will be \$9.18. This is your maximum possible profit since, at any other stock price, you will have to pay off on either the call or the put. The stock price can move by \$9.18 in either direction before your profits become negative. c. Buy the call, sell (write) the put, lend: \$50/(1.1) 1/4 The payoff is: C= 5.18 if S T ≤ X the cash flow in 3 months: 0; if S T > X, the cash flow in 3 months: S T – 50

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• Three '16
• \$4, \$10, \$5.18, \$7.65, \$9.18

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