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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Arjun Industries' share is at Rs 240. A one-year European call with strike Rs 250 is valued at Rs 18 by Black-Scholes. The present value factor for one year at the risk-free rate is 0.95, and the share pays no dividend. What is the value of the European put with the same strike and expiry, using put-call parity?

The put is worth Rs 15.50. Put-call parity gives put = call − spot + present value of strike, which is 18 − 240 + 237.5. Using the undiscounted strike of Rs 250 would wrongly give Rs 28.

  1. ARs 15.50Correct
  2. BRs 28.00
  3. CRs 20.50
  4. DRs 11.50

Explanation

P = C − S + X×DF = 18 − 240 + 250×0.95 = 18 − 240 + 237.5 = Rs 15.50. Using the undiscounted strike gives Rs 28, the error of ignoring time value of money. Rs 20.50 comes from adding the spot price and subtracting the discounted strike (wrong signs).

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