Explore BrainMass

Explore BrainMass

    Put-call Parity

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Consider a portfolio consisting of three positions related to the same asset, namely, one share (price S), one European put (value VP), plus a short position of one European call (value VC). Put and call have the expiration date T, and dividends are paid.

    a) Assume a no-arbitrage market without transaction costs. Show the put call parity

    S + VP - VC = Ke-r(T-t)

    for all t, where K is the strike price and r the risk-free interest rate.

    b) Use the put-call parity to show

    VC(S, t) ≥ S - Ke-r(T-t)

    VP(S, t) ≥ Ke-r(T-t) - S

    © BrainMass Inc. brainmass.com June 3, 2020, 9:02 pm ad1c9bdddf
    https://brainmass.com/business/business-math/put-call-parity-example-problem-163919

    Attachments

    Solution Summary

    Put-call parity is investigated. The solution is detailed and well presented.

    $2.19

    ADVERTISEMENT