Here are some helpful hints for Problem Set 9, problem 2:
- Scenario A requires solving for call and put option prices using the Black-Scholes-Merton option pricing formulas. See the Part 2 option pricing lecture note, page 21, for a numerical illustration of how to do this.
- Scenario B requires finding the current price of the underlying asset, where the call, put, and exercise prices are all given. Solve the put-call parity equation () for S.
- Scenario C requires finding the exercise price, where the call, put, and underlying asset prices are all given. Solve the put-call parity equation for K.
- Scenario D requires finding for a call option worth $2.38 and a put option worth $3.60. Feel free to use the Black-Scholes spreadsheet from the course website, or better yet, create your own Excel spreadsheet in which you solve for the call and/or the put by varying (this can be accomplished either via trial and error or better yet, by using either Solver or Goal Seek). An important lesson you’ll learn from this part of problem 2 is that call and put option prices are positively related to .