A call option expiring in 2 months has a market price of $11.38. The current sto

Question

A call option expiring in 2 months has a market price of $11.38. The current stock price is $80, the strike price is $70, and the risk-free rate is 4% per annum. Calculate the implied volatility.

A) 20%

B)25%

C)30%

D)35%

Q2. According to the put-call parity, the following condition must be met for the call price to be equal to the put price, when all the other factors are the same:

A) Both call and put must be American style option

Both options must meet the lower-bound and upper-bound conditions

C) Exercise price should be equal to forward price

Put-call parity means put price and call price are the same

A) Both call and put must be American style option

Both options must meet the lower-bound and upper-bound conditions

C) Exercise price should be equal to forward price

Put-call parity means put price and call price are the same

Explanation / Answer

We have following formula for Put:

c= S + p – Xe – r(T-t)

We have following formula for call:

p = c – S + Xe – r(T-t)

Equating these formulas, we get:

c= S + p – Xe – r(T-t) = p = c – S + Xe – r(T-t)

p-c= -S+Xe –S+Xe

p-c= -2( S –Xe)

S-Xe is the formula for upper bound and there is a negative sign outside the bracket. Therefore both upper bound and lower bound conditions should be made for call price to be equal to put price. Hence option B is correct.

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