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Put-call parity - The Keller Fund's Option Investment Strategies

Harvard Business Case:
9-295-096
January 19, 1995
The Keller Fund's Option Investment Strategies

1. If you owned Lotus's stock, but were concerned about the possibility of bad news, how might you use options to protect yourself against the risk of a price decline?

2. Suppose on January 18, 1994, the daily yield to maturity of T-bills is 0.0078%. The call option with X=55 for Lotus's common stock maturing in February 19, 1994 is $2.875 per share, while the put option on Lotus' stock with the same maturity and exercise price is $2.625 per share. Do the quoted put and call option prices appear to be consistent with the put-call parity relationship? If not, how will you make a riskless arbitrage profit? What might explain such apparent violations, other than simple mispricing?

Solution Preview

Please see the attached file.

1. If you owned Lotus's stock, but were concerned about the possibility of bad news, how might you use options to protect yourself against the risk of a price decline?

a) If you are long on Lotus's stock and are concerned about a possible drop in price in the short term, you can use a Protective Put strategy to help minimize losses. This strategy requires being long on the stock and longing a put. The chart below details the payoff and profit functions given an increase or ...

Solution Summary

The put-call parity for The Keller Fund's option investment strategies are examined.

$2.19