FIN 3506 Lecture Notes - Lecture 7: Risk-Free Interest Rate, Put Option, Call Option

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bronzeturtle979

6 Oct 2016

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Learning objectives: understand the bounds for a stock option, learn and be able to apply put/call parity, the effects of dividends on the bounds of options and put/call parity, understand what the price of an option depends upon. The price of an option depends on the following: the strike price, the market price of the underlying asset, the volatility of the underlying asset, the risk free rate, the time to expiration. As we learned earlier the factors that affect the value of an option are the current price of the underlying asset, the strike price of the option, and the dividends expected during the life of the option. These affect the intrinsic value of the option. The volatility of the underlying asset, the time to expiration, and the risk-free rate affect the time premium of the option. The price of a call must exceed or be equal to the current market price minus the present value of the strike price.

Related Questions

Consider the six influences on call and put options valuation â asset price, exercise or strike price, time to expiration, risk free rate of return, dividend or income yield, and asset volatility. Which of the six, when increasing, raises the market price of a call option on the same asset and which, when increasing, decreases this callâs market price? Which of the six, when increasing, raises the market price of a put option on the same asset and which, when increasing, decreases this putâs market price?

taupewildebeest962

Q1. Put-call parity

Does put-call parity mean the put and the call option (of the same stock, with same expiration, with same strike price) have the same value/price?

If not, for put and call to have the same prices, what must be the relationship between the strike price and the current stock price?

Hint: Find the Apple option page from Yahoo Finance and look for the strike price where the call and put price are similar.

Q2.A European call option and a European put option on a stock both have the same strike price of $45 and expire in 6 months. Currently, the market call price is $10 and the put price is $6. The risk-free rate is 2% per annum, and the current stock price is $49. Identify the arbitrage opportunity open to the trader. All the interest rates are with continuous compounding.

greyhamster119

Kevin examines both American- and European-style options that have the same stock, expiration date, and strike price. Kevin argues that the European-style option will be sold at a higher price than the American-style option.

A. Examine Kevinâs belief given that the stock closed at $40, has an exercise price of $42 on the put and call options, the one-year put option is $3, the Treasury bill is 4.5%, and it expires in one year.

B. Calculate the value of a European-style option given put-call parity.

C. Determine the impact on the call option if (i) there is a rise in volatility; (ii) there is an increase in interest rate; and (iii) the time of option expiration declines.

Please be more specific in your response. Thank you in advance!

FIN 3506 Lecture Notes - Lecture 7: Risk-Free Interest Rate, Put Option, Call Option

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