Sunteți pe pagina 1din 27

Basics of Derivative

Pricing and Valuation


Pricing of Options based on
Put-Call Parity
Protective Put

ST unknown future spot


Put seller

p0
X exercise price

Initial p0
position S0
S0 + p0 Asset

S0

time
0 T

Pricing of Options based on Put-Call Parity


Protective Put Value of put option
PT = max( 0 , X - ST )
Investor lets put
option expire
Asset
PT = 0
ST
Put seller

p0
X
Initial p0
position S0
S0 + p0
S0

time
0 T

Pricing of Options based on Put-Call Parity


Protective Put

Asset

ST
Put seller

p0
X PT = 0
Initial p0
position S0 Ending
position
S0 + p0
S0 ST if ST > X

time
0 T

Pricing of Options based on Put-Call Parity


Protective Put Value of put option
PT = max( 0 , X - ST )
Investor exercises
X put option
PT = X - ST

Put seller

p0
X
Initial p0
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X

time
0 T

Pricing of Options based on Put-Call Parity


Protective Put
Underlying Asset + Long Put

Put seller

p0
X
Initial p0 PT = X - ST
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X

X if ST < X
ST

time
0 T

Pricing of Options based on Put-Call Parity


Protective Put
Payoff Unlimited
Underlying Asset + Long Put
upside!

Downside
X
truncated
Ending
position

Payoff from long ST if ST > X

position in X if ST < X
Payoff from long underlying
position in put
option

0 ST X
Underlying Spot Price at Expiration, ST

Pricing of Options based on Put-Call Parity


Fiduciary Call

ST
Call seller
c0 X exercise price
c0
X/(1+rf)T
Initial
position

c0 + X/(1+rf)T Risk-free
bond

X/(1+rf)T

time
0 T

Pricing of Options based on Put-Call Parity


Fiduciary Call Value of call option
CT = max( 0 , ST - X )
Risk-free
Asset
bond Investor exercises
call option
CT = ST - X
ST
Call seller
c0 X exercise price
c0
X/(1+rf)T
Initial
position

c0 + X/(1+rf)T

X/(1+rf)T

time
0 T

Pricing of Options based on Put-Call Parity


Fiduciary Call

Risk-free
Asset
bond

ST
Call seller CT = ST - X
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T
X ST if ST > X

X/(1+rf)T

time
0 T

Pricing of Options based on Put-Call Parity


Fiduciary Call Value of call option
CT = max( 0 , ST - X )
Risk-free
bond Investor lets call
option expire
CT = 0

Call seller
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T ST
ST if ST > X

X/(1+rf)T

time
0 T

Pricing of Options based on Put-Call Parity


Fiduciary Call
Long Call + Risk-free Bond
Risk-free
bond

Call seller CT = 0
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T ST
X ST if ST > X

X/(1+rf)T X if ST < X

time
0 T

Pricing of Options based on Put-Call Parity


Fiduciary Call
Payoff
Long Call + Risk-free Bond

Ending
position

ST if ST > X

X if ST < X

0 ST X
Underlying Spot Price at Expiration, ST

Pricing of Options based on Put-Call Parity


Protective Put Fiduciary Call
Underlying Asset + Long Put Long Call + Risk-free Bond

X X

Ending Ending
position position

ST if ST > X Same results! ST if ST > X

X if ST < X X if ST < X

X X
Underlying Spot Price at Expiration, ST Underlying Spot Price at Expiration, ST
Pricing of Options based on Put-Call Parity
Protective Put Fiduciary Call
Underlying Asset + Long Put Long Call + Risk-free Bond

Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T
Put seller Call seller
c0
p0 c0
p0
S0
Risk-free
Asset bond

X/(1+rf)T
S0

0 0

Pricing of Options based on Put-Call Parity


Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T

p0 - c0 = X/(1+rf)T - S0

Put seller Call seller


c0
p0 Discount by 1.0 ¼ c0
$100 X 4
p0 $99.02

S0 $90
Risk-free
Asset bond

X/(1+rf)T
S0 rf: 4%

0 3 mth 0

Pricing of Options based on Put-Call Parity


Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T

p0 - c0 = $99.02 - S$90
0
Given $15.00 $5.98 No-arbitrage price

Put seller Call seller


c0
p0 Discount by 1.0 ¼ c0
$100 X 4
p0 $99.02

S0 $90
$9.02
Risk-free
Asset bond

X/(1+rf)T
S0 rf: 4%

0 3 mth 0

Pricing of Options based on Put-Call Parity


Jimmy would like to short a stock, but could not find an avenue to take a short position.
Using put-call parity, construct a synthetic equivalent of a short position in the stock.

Short Stock Long Put Borrow at Rf

- S0 = p0 - c0 - X/(1+rf)T

Short Call

The synthetic equivalent of shorting a stock is to:


- borrow the PV of X at risk-free rate for a period T,
- long the put option with strike at X, expires in T,
- short the call option with strike at X, expires in T.
Jimmy found out that the stock is trading at $11, and the 1 year put with the strike at
$10.50, is trading at $1. The 1 year call with strike at $10.50 is trading at $3. Assuming a
risk-free rate of 5% and negligible transaction fees, is there an arbitrage opportunity?

- S0 = p0 - c0 - X/(1+rf)T

-$11 $1 - $3 - $10.50/(1.05)1

-$11 ≠ -$12

Since the values do not conform to the put-call parity


relationship, there is an arbitrage opportunity here.
Put-Call-Forward Parity

Long Asset + Short Forward = Risk-free bond

Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T

Pricing of Options based on Put-Call Parity


Put-Call-Forward Parity
Equivalent to long forward

Long Asset = Risk-free bond +- Short


Long Forward

Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T

Pricing of Options based on Put-Call Parity


Synthetic Protective Put
Risk-free bond + Long Forward + Long Put

Put seller

p0
X
Initial p0 PT = X - ST
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X
Asset
X if ST < X
ST

time
0 T

Pricing of Options based on Put-Call Parity


Synthetic Protective Put
Risk-free bond + Long Forward + Long Put

Put seller

p0
X
Initial p0 F0(T) PT = X - ST
position S0 Ending
position
ST
Asset
X if ST < X
ST

time
0 T

Pricing of Options based on Put-Call Parity


Synthetic Protective Put
Risk-free bond + Long Forward + Long Put

Asset

ST
Put seller

p0
X
Initial p0 F0(T)
position S0 Ending
position

ST if ST > X

X if ST < X

time
0 T

Pricing of Options based on Put-Call Parity


Synthetic Protective Put
Risk-free bond + Long Forward + Long Put

Put seller

p0
X
Initial p0 F0(T)
position F0(T)/(1+rf)T Ending
F0(T)/(1+rf)T position
+ p0 ST if ST > X
No cash outlay
F0(T)/ at initiation for X if ST < X
(1+rf)T forwards

time
0 T

Pricing of Options based on Put-Call Parity


Put-Call-Forward Parity

Initial Initial
position position
Synthetic Protective Put F0(T)/(1+rf)T
Equivalent Fiduciary Call
+ p0 c0 + X/(1+rf)T

Pricing of Options based on Put-Call Parity


Put-Call-Forward Parity

F0(T)/(1+rf)T + p0 = c0 + X/(1+rf)T

Put-Call Parity

S0 + p0 = c0 + X/(1+rf)T

Pricing of Options based on Put-Call Parity

S-ar putea să vă placă și