J hawkins econ 136 financial economics 18 18 300 put

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Unformatted text preview: The portfolio payoffs and prices: Price Payoff Payoff Payoff portfolio 1 C0 + Ke −rt call payoff + K max (ST − K , 0) + K max (ST , K ) portfolio 2 S0 + P0 ST + put payoff ST + max (K − ST , 0) max (ST , K ) Equal payoffs implies equal prices: C0 + Ke −rt = S0 + P0 or Derivatives III: R. J. Hawkins C − P = S − Ke −rt Econ 136: Financial Economics 2/ 10 Put-Call Parity: Example 1 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 $2.25. Calculate prices of our two portfolios 1 portfolio 1: C + Ke −rt = 3.00 + 30e −0.1×0.25 = 32.26 2 portfolio 2: P + S = 2.25 + 31 = 33.25 Execution: Buy cheap portfolio and sell (short) expensive portfolio 1 Construct position today: Sell portfolio 2 and buy portfolio 1. P + S > C + Ke −rt so P + S − C − Ke −rt > 0 2 Unwind position at option expiration Derivatives III: R. J. Hawkins Econ 136: Financial Econo...
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This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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