AD 13: The Dow Jones Industrial Average on August 15, 2008 was 11,660 and the price of the December 117 call was $3.50. Assume the risk-free rate is 4.2%, the dividend yield is 2% and the option expires on December 25 (options markets are closed the day after Christmas).
Q1: Use Derivagem to calculate the implied volatility of the call option.
Q2: Use put-call parity to estimate the no arbitrage price of a December 117 put.
Q3: Given the price determined in Q2, use Derivagem to calculate the implied volatility of the put option.
Q4: What do you conclude about put-call parity and implied volatility for European options
Adapted from Fundamentals of Futures and Options Markets, 6th ed., John C. Hull. Chapter 13
Calculates the implied volatility of the call option, uses put call parity to calculate the value of put option.