1 Risk-free interest rate

• Use interest rate to Translate “Strike Price -> Present Value”
  • You get offered a contract to get $100 in a year aka Strike Price BUT
    what is that $100 Really worth Now(Present Value) ?
    • Assuming 5% risk-free interest rate compounded monthly:
      \(100 \times (1+(0.05)\frac{1}{12})^{12}\)
    • Another common phrase is 5% risk-free interest rate compounded continuously:
      \(100 \times e^{1+0.05}\)

2 Put-Call Parity is a Forward contract

\[CallPrice + (\frac{OptionStrike}{riskFreeRate}) \stackrel{?}{=} PutPrice + StockPrice\]

• Holding Put and Call Options of the same (strike price, Expiration date) is Equal to
  Holding Forward Contract with the same Expiration date
  • Forward Price of Contract is same as Option strike price

Given: price to buy long stock is 500
Given: Risk-Free Interest Rate
Given: Option call w/ strike price K , Expiration: 1 yr, Cost: 66.59
Given: Option put w/ strike price K, Expiration: 1 yr, Cost: 18.64