In: Finance
A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month, what is the estimated price of a call option with an exercise price of $830? Please show step by step
Let us assume that the duration of the option is one month.
As per the PUT-CALL parity formula:
P = C - S + PV(X)
Where, P = Premium of PUT option
C = Premium of CALL option
S = Spot price or the current Index price
PV(X) = Present value of the strike price
Here, the premium of Put option is given, we are supposed to calculate premium of Call option
Therefore, C = P + S - PV(X)
PV(X) can be calculated on Microsoft Excel
Following are the steps to be followed on Microsoft Excel:
Step 1: Click on "FORMULAS" tab at the top of Microsoft
Excel
Step 2: Select the option "Financial"
Step 3: Under "Financial" select the option "PV"
Step 4: Insert Rate = 0.05 Nper = 1 / 12 FV = -830
PV = 826.63
Therefore, C = P + S - PV(X)
= 18 + 830 - 826.63
= 21.37
Hence, the Call option premium is $21.37