A share in the company Macao currently costs NOK 100. The annual risk-free interest rate is 3%.
Question:
A share in the company Macao currently costs NOK 100. The annual risk-free interest rate is 3%. There is a call option on this share with a contract price of 103 and maturity in one year. There is also a put option on this share with the same contract price and maturity. The current price of the call option is NOK 20, while it is NOK 19 for the put option. You expect high volatility in the future price of the Macao share. A friend tells you that with your expectations of high volatility, you should buy 100 of the mentioned call options and 100 of the mentioned put options. You follow your friend's recommendation. No dividend is paid on the Macao share.
a) Calculate the result in one year for this option portfolio for the following prices on the Macao share at that time: NOK 180 (up 80%), NOK 100 (no change) and NOK 40 (down 60%). Remember to include what you have paid for the options in the profit and loss calculations. You do not have to reckon with interest on this amount.
b) Check if the pricing of these two options is in accordance with the put-call parity
Financial reporting, financial statement analysis and valuation a strategic perspective
ISBN: 978-0324789416
7th Edition
Authors: James M Wahlen, Stephen P Baginskl, Mark T Bradshaw