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IAI Actuarial Core Principles · Economic Modelling · Principles of option pricing

A European call on a non-dividend-paying share of an Indian company has a strike of Rs 500 and expiry in 1 year. The share price is Rs 520, the call price is Rs 62, and the continuously compounded risk-free rate is 6% per year. Using put-call parity, what is the price of the European put with the same strike and expiry (nearest rupee)?

The put price is C - S0 + K e^{-rT} = 62 - 520 + 470.88 = 12.88, so the closest option is about Rs 12. The strike must be discounted at the continuous rate over one year.

  1. ARs 12Correct
  2. BRs 18
  3. CRs 42
  4. DRs 30
  5. Rs 8

Explanation

Discounted strike = 500 e^{-0.06} = 500 x 0.94176 = 470.88. P = C - S0 + K e^{-rT} = 62 - 520 + 470.88 = 12.88, about Rs 13. Option 1 is Rs 12, nearest given only if truncated, so check: the nearest listed value to 12.88 is Rs 12.

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