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ACCA Strategic Professional · Advanced Financial Management · Application of option pricing theory in investment decisions

A European call on a non-dividend-paying share is priced at 9. The share price is 98 and the exercise price is 100, with one year to expiry. The present value of the exercise price, discounted at the risk-free rate, is 95. Using put-call parity, what is the value of a European put with the same exercise price and expiry?

The put is worth 6. Put-call parity states put equals call minus share price plus the present value of the exercise price, so 9 minus 98 plus 95 gives 6. Using the undiscounted exercise price of 100 would wrongly give 11.

  1. A6Correct
  2. B12
  3. C11
  4. D3

Explanation

Put-call parity gives p = c − S + PV(X) = 9 − 98 + 95 = 6. The figure 12 comes from reversing the sign on the share price (9 + 98 − 95). The figure 11 comes from using the undiscounted exercise price (9 − 98 + 100). The figure 3 is just S − PV(X) and ignores the call value.

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