This website uses cookies to ensure you have the best experience. Learn more

Call Put Parity Essay

685 words - 3 pages

Synthetic Forward and Put­Call­Parity 
  A synthetic long forward can be created by purchasing a call option and writing a put option  with the same strike price and the same expiration date.  Let’s say,  that an investor buys a $500‐strike call option and sells a $500‐strike put option,  both options have the same expiration time T. At T, the spot price will be equal to, above or  below the strike price.   If the spot price is above the strike price K, the investor will exercise the call option and buy  the underlier for $500. The put will not be exercised. If the spot price is below the strike price  the written put will be exercised against the investor, forcing him to buy the underlier at $500.  The call will expire worthless. In either case, the underlier will be purchased at the strike price.  The payoff of this combined position is 

max{0, S - K}- max{0, K - S} = S - K  
Call Put

...view middle of the document...

 This means you have to pay $0 today and at  time T you are obliged to buy the asset at F0,T.   The cost of the contract today is the present value of F0,T, PV(F0,T). Now we pay Call(K, T) –  Put(K, T) today to buy the option on that asset for K at time T which results in a cost at time 0  of Call(K, T) – Put(K, T) + PV(K). And using the “no‐arbitrage” pricing, the net cost of the asset  must be the same whether through options or forward contract, that is   

Call(K, T) – Put(K, T) = PV(F0,T‐K).                                                                                         (CP.1)                                                  That means:  {The premium for a Call Option (at strike price K and expiration at time T)  minus  the premium for a Put Option (at strike price K and expiration at time T)}  equals  {the present value of the difference between the “no‐arbitrage” forward price (with the same  expiration time T) and the option’s strike price.}     

  Let us have a closer look at the different terms:  PV(F0,T)  is equal to the current spot price of the underlier, and therefore represents a long position in  the underlier.  PV(K)  is the present value of an amount K payable in T years; it represents a T‐year‐zero‐coupon  bond with maturity value K.    Let us show the Put‐Call‐Parity with the help of the following graphic: 

  Exhibit CP.1: Put‐Call‐Parity (Kind Courtesy of Glyn Holton –  We have two portfolios: One comprises a Call Option and a cash amount (the PV of the call  options strike price), and the other portfolio comprises a Put Option and the underlier.  When  the expiration value of each of these portfolios is the same, then  the “no‐arbitrage”  opportunity tells us that the present value of these expiration values must also be the same.  And this is called Put‐Call‐Parity.  Let’s refer to formula (CP.1) and make some rearrangements:  PV(F0,T) – Call(K, T) = ‐ Put(K, T) + PV(K)  Writing a “covered call” is equivalent to writing a put option and buying a zero‐coupon‐bond  for the amount K    ‐PV(F0,T) – Put(K, T) = ‐ Call(K, T) – PV(K)   Writing a “covered put” is equivalent to writing a call  option and taking out a loan of amount K. 

Other Essays Like Call Put Parity

The policy part 1 Essay

1253 words - 6 pages legislature. After the bill reaches the committee, it is put on the calendar. From here the committee can either consider the bill themselves or they can refer the bill to a subcommittee. Through the committee and subcommittee decisions about the content and language of the bill are made. The subcommittee can call for a hearing where the bill will be examined section by section, to make changes before the bill goes back to the main committee. â

Business Action Plan Essay

1203 words - 5 pages by women. On Fortune Service 500 companies, 5.6% of corporate directors are women. The rate of increase is so slow that parity with men on corporate boards will not be achieved until the year 2116 (Morrison, 2005). In 1980, only one woman held the rank of CEO of a Fortune 500 company. This woman came into the top management by inheriting the company from her father and husband. She was joined in 1985 by a second woman who reached the top by

Capital Mkt

1944 words - 8 pages know how to use them. |Call IV = max.[S-X,0] |[pic] | | | | |[pic] |[pic

International Human Resource Management

2504 words - 11 pages their nation in creating funds in the development of China. Although there are many other nations that are currently in their development stage, such as Vietnam, and India, Stuart Harris furthermore states "Although China is not unique, or no more so than many other countries, its characteristics do differentiate it from many developing countries. The per capita income level, even on a purchasing power parity basis, makes it clear that China is

Indo-Pak Relations

4886 words - 20 pages believe that India and Pakistan ought to be coequals geopolitically and it sees relative parity in military and diplomatic terms as a goal worth striving for, even at a high cost to society. Thus, India’s efforts at achieving major power status and gaining permanent membership in the UN Security Council are viewed with great alarm and all means are employed to avert this prospect. Pakistan fears that Indian hegemony in the subcontinent will

Term Paper

5788 words - 24 pages helped entice foreign portfolio investors to put their investment here. Interest rates in emerging Asia are rising while those in the West, led by the United States, are still at record lows. During the past two years, the Philippine peso has been one of the strongest currencies in Southeast Asia. Aside from the inflow of portfolio and foreign direct investments, the rise in the peso was also caused by increased dollar remittances from

International Finance

4512 words - 19 pages when there are no transaction costs and interest rate parity is active, the results of the money market hedge are similar to those of a forward hedge (Madura, 2003). D).Currency Options Hedge- this hedging technique uses currency options, these are either put or call options to hedge exchange rate exposure (Nder & Sexton, 2011). A call option gives the holder of the asset the right to buy it. A put option awards the owner of the property the

Marxism Within Blt

5258 words - 22 pages  economic parity… thus the fortunate who are among us combines forces with the less fortunate to become agents of change for God who is not pleased with America’s economic mal-distribution!”[13] As one reads Cone’s work, one must keep in mind that whenever the author refers to white or black, he’s referring not to a person’s skin color but rather to the labeling of his racist soul. In other words, one is white if or when one practices

Female Econonmy

4250 words - 17 pages spending as much as they might. For one thing, there are too many choices; it’s a male-dominated industry in which men make hit-or-miss guesses about what women want, and products come and go at a rapid pace. Women are passionate about the industry and well represented in jobs at the entry level, but female employment drops off at the executive and senior leadership levels. A good first step toward gaining market share might be to put more women

Work Fexibility

5500 words - 22 pages are finding ways to give their most valued employees flexibility but, all too often, workers who need flexibility find themselves shunted into part-time, temporary, on-call, or contract jobs with reduced wages and career opportunities – and, often, no benefits. A full quarter of American workers are in these jobs. Only 15 percent of women and 12 percent of men in such jobs receive health insurance from their employers.3 JUNE 2005 A number of

Ethical Hacking

5637 words - 23 pages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Windows OS Vulnerabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Windows File Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remote Procedure Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NetBIOS

Related Papers

Foreign Exchange Markets Essay

994 words - 4 pages at a designated price within a specific period of time. A currency call option is a contract that grants its owner the right – not the obligation – to buy a specific currency, and a currency put option grants its owner the right to sell. Both call and put options have designated prices and volumes, as well as defined periods within which the options must be exercised. Call-option A currency call option is a contract that grants its

Option Greeks Essay

2069 words - 9 pages Strike price (Put–Call Parity) and depending on Theta and Vega of the option. * Delta is sensitive to changes in volatility and time to expiration If expiry time or volatility is more there is less certainty about whether the option will be ITM or OTM at expiration, and is reflected by delta of their call and put options. * As time passes, the delta of in-the-money options increases and the delta of out-of-the-money options decreases. As

Macdonalds Problem Essay

2967 words - 12 pages also influence the price of an option. As such a mathematical model called the Black-Sholes model was defined by which calloptions can be priced with certainty. The Black Scholes formula is as follows The Put Call Parity theorem is used to determine the value of a put option. Value of Put (P) + Value of share (S) = Value of Call (C ) + Present Value of Exercise Price (PV[E]) The major determinants of the market value of the call option

Fins 3616 Ch6 Essay

2331 words - 10 pages Kirt C. Butler, Solutions for Multinational Finance, 4th edition Chapter 6 Currency Options and Options Markets Answers to Conceptual Questions 6.1 What is the difference between a call option and a put option? A call option is an option to buy the underlying asset at a predetermined exercise price. A put option is an option to sell the underlying asset at the exercise price. 6.2 What are the differences between exchange-traded