Unformatted text preview: nt value of the exercise price. b. Again we rearrange the putcall parity relationship: PV(EX) = Value of put Value of call + Share price This implies that, in order to replicate the payoffs of a bond, you buy a put, sell a
call, and buy the stock. 14. a. Use the putcall parity relationship for European options: Value of call + Present value of exercise price = Value of put + Share price Solve for the value of the put: Value of put = Value of call + PV(EX) Share price
Thus, to replicate the payoffs for the put, you would buy a 26week call with an
exercise price of $100, invest the present value of the exercise price in a 26week riskfree security, and sell the stock short. b. Using the putcall parity relationship, the European put will sell for:
8 + (100/1.05) 90 = $13.24 15. a. From the putcall parity relationship: Value of call + Present value of exercise price = Value of put + Share price Equity + PV(Debt, at riskfree rate) = Default option + Assets $250 + $350 = $70 + $530...
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- Fall '04
- Math, Exercise Price, 85, Mr. Colleoni, b. Bond