Problem

Put-call parity asserts that if the markets are in equilibrium, a long position in a stock...

Put-call parity asserts that if the markets are in equilibrium, a long position in a stock and a put produces the same return (or profit/loss) as a long position in a discounted bond and call with the same strike price as the put. You are given the following information:

Price of the stock $50

$50.00

Interest rate 5%

5%

Price of a $50 bond discounted at the current interest rate $47.

$47.62

62 Price of a call to buy the stock at $50 $ 5.38

$5.38

Price of a put to sell the stock at $50 $ 3.00

$3.0

Use the following prices of the stock ($60, $50, and $40) to verify the above statement

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Solutions For Problems in Chapter 18