00 and the price of a 3 month european put is 100

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Unformatted text preview: −0.1×0.25 = 32.26 2 portfolio 2: P + S = 1.00 + 31 = 32.00 Execution: Buy cheap portfolio and sell (short) expensive portfolio 1 Construct position today: Sell portfolio 1 and buy portfolio 2. C + Ke −rt > P + S so C + Ke −rt − P − S > 0 2 Unwind position at option expiration Derivatives III: R. J. Hawkins Econ 136: Financial Economics 5/ 10 Put-Call Parity: Example 2 Suppose the stock price is $31, exercise price is $30, risk-free rate is 10% per year, the price of a 3-month European call is $3.00 and the price of a 3-month European put is $1.00. Execution details 1 Construct position today: 1 2 3 4 2 Buy (go long) the put. Buy (go long) the stock. Sell (go short) the call. Borrow (short a deposit) the 1 + 30 − 3 = $29 you need. Unwind position at option expiration: 1 2 3 4 If S < $30 you exercise your put. If S > $30 your short call will be exercised against you. Use your long stock to close out your option position (in both cases you sell your stock at $30). Pay back loa...
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