Question

QUESTION 8 Consider two "corresponding" options, consisting of a call and a put with the exact same parameter values. For this pair, the current price of the underlying asset is $96, the options have an exercise price of $87 and they expire in 7 months. Additionally, the risk-free rate is 4% p.a. What is the difference between the premium of the put option, P, and the premium of the call option, C; that is, what is the value of P - C? Write the answer with two decimals; e.g., 3.24. Do NOT use the $ symbol in your answer; just write a numerical value. Of course, include the negative sign if the answer is negative; but do not include the positive sign if the answer is positive. NOTE: Use the continuous time version of the Put-Call Parity equation (i.e., do NOT use the book's version).

Answer 1

Using put call parity we see that
S+P=C+Xe^(-rt)
=>P-C=Xe^(-rt)-S
=>P-C=87*e^(-4%*7/12)-96
=>P-C=-11.0064998