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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

A European call on the shares of Kaveri Motors has a Black-Scholes value of Rs 160. The spot price is Rs 1,400, the exercise price is Rs 1,500, expiry is 6 months away and the continuously compounded risk-free rate is 8% p.a. Use e^-0.04 = 0.960789. What is the value of a European put with the same strike and expiry (no dividends)?

The put is worth Rs 201.18. Using put-call parity, put equals call minus spot plus the present value of the exercise price: 160 - 1,400 + 1,500 x 0.960789 = 201.18. The strike must be discounted at the continuously compounded risk-free rate.

  1. ARs 201.18Correct
  2. BRs 260.00
  3. CRs 118.82
  4. DRs 321.22

Explanation

Put-call parity: P = C - S + X e^-rt. X e^-rt = 1,500 x 0.960789 = 1,441.18. P = 160 - 1,400 + 1,441.18 = Rs 201.18. Ignoring discounting gives Rs 260, which is wrong because the strike must be present-valued.

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