e0 - Illinois State University

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Krzys’ Ostaszewski, http://www.math.ilstu.edu/krzysio/, Exercise 120, 9/1/7
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Study Note FM-09-07, Problem No. 2
You are given the following information:
• The current price to buy one share of XYZ stock is 500.
• The stock does not pay dividends.
• The risk-free interest rate, compounded continuously, is 6%.
• A European call option on one share of XYZ stock with a strike price of K that expires
in one year costs 66.59.
• A European put option on one share of XYZ stock with a strike price of K that expires
in one year costs 18.64.
Using put-call parity, determine the strike price, K.
A. 449
B. 452
C. 480
D. 559
E. 582
Solution.
Using put-call parity, we have
C ! P = 66.59 ! 18.64 = S ! PV ( K ) = 500 ! Ke!0.06 .
Therefore,
K = ( 500 ! ( 66.59 ! 18.64 )) " e0.06 # 480.0032.
Answer C.
© Copyright 2007 by Krzysztof Ostaszewski.
All rights reserved. Reproduction in whole or in part without express written
permission from the author is strictly prohibited.
Exercises from the past actuarial examinations are copyrighted by the Society of
Actuaries and/or Casualty Actuarial Society and are used here with permission.
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