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ashleyw
01-08-2008, 02:19 PM
One year European call and put options are tradin gon the stock of British Petroleum. Options YY have exercise prices (strike prices) of \$110; options ZZ have exercise prices of \$115. The stock price is now \$100. The risk-free rate is 10% with annual compounding. Call YY and put YY have exercise prices of \$110; call ZZ and put ZZ hace exercise prices of \$115. Which of the following is true?

A. Call YY > Put YY and Call ZZ > Put ZZ
B. Call YY > Put YY and Call ZZ < Put ZZ
C. Call YY < Put YY and Call ZZ > Put ZZ
D. Call YY < Put YY and Call ZZ < Put ZZ
E. Call YY = Put YY and Call ZZ < Put ZZ

Just thinking about it logically. I would assume that the relationship between Call YY and Put YY would be the same relationship as the one between Call ZZ and Put ZZ because they both have exercise prices that are higher than the current stock price. I thought it would be choice D. The answers say that it is choice E. Can anyone explain this??

sheridan
01-08-2008, 02:28 PM
Use the put call parity:

For Options YY

call + PV(EX) = put + stock
call + 110/1.10 = put + 100
call + 100 = put + 100
So Call YY = Put YY

For Options ZZ

call + PV(EX) = put + stock
call + 115/1.10 = put + 100
call + 105 = put + 100
So Call ZZ < Put ZZ

ashleyw
01-08-2008, 02:36 PM
I'm a dork! Thanks!