Exercise 6A

To find the put premium using the put-call parity

From the slide

Stock index option-continuous compounding

Stock index = 4500 (So), with dividend yield =4% per annum (q)

Risk free rate = 3% per annum (r)

3-month (T= 0.25) European call option on the index:

Strike = 4450 (K), call premium = $120 (c)

Find price (p) of a 3-month index put option with strike 4450.

Look ppt slide on single share, this instrument is a Stock index, continuous compounding.

First, list all the assumptions of put call parity.

European

Same strike

Same maturity (call date and put date)

Same asset

Second, do the calculation

Continuous compounding

Remember q,r,T all in years

Exercise 6B

Relative volatility of an asset class index to volatility of a single asset.

Asset class- shares, bonds, properties, commodities etc

Index - represent the movement of all assets in the class

Single asset - referring to one share only

Example of asset class index and single asset:

Asset class indices

Single share

E.g Toyota

Exercise 6C

Protective put for share portfolio insurance; effect of a higher beta value on insurance cost (put premium)

Buy a protective put in the form of insurance

Higher beta higher risk

The put premium will be higher

Go Research provide two reasons why it is higher.

1