24Lecture24

# P s c ke rt so p s c ke rt 0 2 unwind position

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Unformatted text preview: mics 3/ 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. Execution details 1 Construct position today: 1 2 3 4 2 Sell (short) the put. Short the stock. Buy (go long) the call. Lend (long a deposit) the 2.25 + 31 − 3.00 = \$30.25 Unwind position at option expiration: 1 2 3 4 Close out your deposit worth \$31.02 = \$30.25e +0.1×0.25 . If S > \$30 you exercise your call. If S < \$30 your short put will be exercised against you. Use long stock from options exercise (you buy at \$30 in both cases) to close out short stock position. Proﬁt on the trade is \$31.02 − \$30.00 = \$1.02 Derivatives III: R. J. Hawkins Econ 136: Financial Economics 4/ 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. Calculate prices of our two portfolios 1 portfolio 1: C + Ke −rt = 3.00 + 30e...
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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 Berkeley.

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