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Question of the Week – Derivatives

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    • Avatar of AdaptPrepAdaptPrep
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        • Undecided
        12 May 2018 at 7:32 pm
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        You are interested in purchasing a 1-year call for Unic Technology at a strike price of $80. The stock is currently selling for $70; a 1-year put for Unic at $80 is worth $15. The risk-free interest rate is 3%, and the yield on Unic’s 1-year senior bonds is 5%. The price of the call should be closest to:

        • $5
        • $6
        • $7
      • Avatar of AdaptPrepAdaptPrep
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          • Undecided
          16 May 2018 at 7:08 am
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          A synthetic call can be created with a long put, long stock,
          and short bond.

          We are given:

          • P0 = $15 (put price at time 0)
          • S0 = $70 (stock price at time 0)
          • X = $80 (strike price)
          • r = 3% (risk-free rate)
          • T = 1 (1 year)

          Plug this into the synthetic call formula (derived from
          put-call parity):

          C0 = P0 + S0 – X / (1 + r)^T

          = 15 + 70 – 80 / (1 + 0.03)^1

          = $7.33

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