Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

CFA Events Calendar

View full calendar

CFA Events Calendar

View full calendar

Question of the Week - Derivatives

Des Moines, IA, USAPosts: 211 Sr Associate
edited July 2015
You are interested in purchasing a 1-year call for Unic Technology at a strike price of \$80. The stock is currently selling for \$70; a 1-year put for Unic at \$80 is worth \$15. The risk-free interest rate is 3%, and the yield on Unic's 1-year senior bonds is 5%. The price of the call should be closest to:

Question of the Week - Derivatives 18 votes

\$5
27%
\$6
0%
\$7
72%

• Des Moines, IA, USAPosts: 211 Sr Associate
\$7

A synthetic call can be created with a long put, long stock, and short bond.

We are given:

• P0 = \$15 (put price at time 0)
• S0 = \$70 (stock price at time 0)
• X = \$80 (strike price)
• r = 3% (risk-free rate)
• T = 1 (1 year)

Plug this into the synthetic call formula (derived from put-call parity):

C0 = P0 + S0 – X / (1 + r)^T

= 15 + 70 – 80 / (1 + 0.03)^1

= \$7.33