Read the case carefully and answer the questions given at the end: CAL

Read the case carefully and answer the questions given at
the end:
CALLS PUT
A B
C
Months of expiration 3 9
3
Continuous yearly risk-free
Rate (Rf) 10% 10%
10%
Discrete yearly Rf 10.52%
10.52% 10.52%
Standard deviation of
Stock returns 40% 40%
40%
Exercise price Rs.55
Rs.55 Rs.55
Option price Rs.2.56 -
Rs.6.20
Stock price Rs.50
Rs.50 Rs.50
Cash Dividend Re.0 Re.0
Re.0

1) Why should call B sell for more than call A?
2) Is the put call parity model working for options
A&C?
3) Calculate the Black Scholes values of call A & Call
B?

Question Posted / jiyadutt

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Read the case carefully and answer the questions given at the end: CALLS PUT A ..

Answer / Aditya Alok

1) Call B sells for more than call A because it has a longer time to expiration, which increases its value due to the possibility of greater price movements in the underlying stock. The longer the time to expiration, the higher the probability that the option will be exercised, making it more valuable.n2) To check if the put-call parity model is working for options A and C, we first need to calculate the Black-Scholes values of both calls and then compare them with the corresponding put options. If the sum of the call premium (C) and the present value of the exercise price (Pe) minus the stock price (S) equals the put premium (P), then the model is working.n3) Using the Black-Scholes formula, we can calculate the values for both calls:nCall A: C = SN(d1) - PeN(d2) where d1 = ln(S/Pe) + (Rf+σ²/2)*t and d2 = d1 - σ*√tnCall B: C = SN(d3) - PeN(d4) where d3 = ln(S/Pe) + (Rf+σ²/2)*(t-3) and d4 = d3 - σ*√(t-3)nHere, S is the stock price, Pe is the exercise price, Rf is the risk-free rate, σ is the standard deviation of stock returns, t is the time to expiration (in years), and N is the cumulative normal distribution function.

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