Question

Netflix is selling for $105 a share. A Netflix call option with one month until expiration and an exercise price of $121 sells for $2.30 while a put with the same strike and expiration sells for $17.40. a. What is the market price of a zero-coupon bond with face value $121 and 1-month maturity? (Round your answer to 2 decimal places.) Market price b. What is the risk-free interest rate expressed as an effective annual yield? (Round your answer to 2 decimal place.) Risk-free interest rate Risk-free interest rate %

Answer 1

a)_
The equation expressing put-call parity is:

C + PV(x) = P + S

where:

C = price of the European call option

PV(x) = the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rate

P = price of the European put

S = spot price or the current market value of the underlying asset

As per the given information,
C = $2.30
P=$17.40
S= $105

a. Required market price of the zero coupon bond= PV(x) = P+S - C
= $17.40 + $105 - $2.30
= $120.10

b)
Risk free interest rate = (121/120.1)^12 -1
= 1.0937 - 1
= 0.0937 or 9.37%

Risk free interest rate = 9.37%