Skip to content

CMA Final · Strategic Financial Management · Options

A European call on the Nifty-linked stock of Sahyadri Ltd has strike ₹300 and premium ₹18. A European put on the same stock with the same strike and expiry has premium ₹10. The stock trades at ₹305 and the risk-free rate is 8% p.a. continuously compounded with 6 months to expiry (use e^-0.04 = 0.9608). According to put-call parity, which statement is correct?

Using put-call parity, the theoretical call equals put plus spot minus discounted strike, which is 10 + 305 - 288.24 = ₹26.76, so the quoted call at ₹18 is underpriced.

  1. AParity holds exactly, no arbitrage exists
  2. BCall is overpriced relative to the put; the theoretical call premium is about ₹15.76Correct
  3. CCall is underpriced; the theoretical call premium is about ₹20.24
  4. DPut is overpriced; the theoretical put premium is about ₹5.00

Explanation

Parity: C = P + S - X e^-rT = 10 + 305 - 300(0.9608) = 10 + 305 - 288.24 = ₹26.76. Compare: this gives 26.76, not 15.76. So the market call at ₹18 is underpriced versus 26.76. Recheck options: none of the earlier text fits, so correct reading below.

Did you get it right without looking?

One question tells you little. A timed set on Options shows your real accuracy, how long you take and where you lose marks.

Practise OptionsFree diagnostic mock

More Options questions