Question: Show that the following function 2erT Fo 22h put x- cally K K2 callk.dk] dK T can be approximated by 1 Fo 1) 2

Show that the following function 2erT Fo 22h put x- cally K K2 callk.dk] dK T can be approximated by 1 Fo 1) 2 T Ko where T > 0 is time, r > 0 is a net interest rate, Ko and K are strike prices, and Fo is a futures price. put and call are put resp. call options with strike price K that expire time T in the future. Use the following information: (1) The put-call parity is given by: K put call + eTK - So. = K (2) The future price Fo of the underlying and its current price are related as: Fo= eTT. So. (3) Ko Fo. Hint: this assumption allows the application of a Taylor approximation (see the latest Handout on Blackboard, Section. 13.6).

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