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View Full Version : Relationship of Put and Call prices.

Elk
May 27th 2008, 10:41 PM
This is what I understand about the relationship between puts and calls.

For a given strike price, the call will always have a higher premium than the put. And, if the premiums are the same, then the put will have a higher strike price.

And, if you have the forward price, strike price, interest rate, and the put (or call) price, you can figure out the call (or put) price using put call parity.

Am I understanding things correctly? Is there anything else I should know for exam FM?

GooseyGoose
May 27th 2008, 11:02 PM
looks solid

Those look like the core things to know. I'm sure you could figure other stuff out from knowing these. If you have ASM try doing the questions again where they are like here's 3 statements, which of the following are true. If you feel comfortable you should be fine.

sean t
May 27th 2008, 11:21 PM
maybe I don't unserstand what you're saying, but:

for a given strike K, the call price need not be larger than the put;
ex. if PV(K)> the current stock price (S_0) then call(K)<put(k)

if the premiums are the same, we could have:
PV(K)= S_0 (the call and put have the same K)
so the strike price of the put is not higher than the strike price of the call

Elk
May 27th 2008, 11:41 PM
Goosey Goose, I appreciate your reassuring attitude. But, I feel I have a lot more to understand. Some of the SOA sample DM questions are tricky, I think. The ASM questions are pretty easy in comparison. I know way more than I did before, but there is just so much underlying information. And, with about every topic in FM, there always seems to be more to understand.

Elk
May 27th 2008, 11:45 PM
OK Sean, I see what you're saying. I should have specified "if the call is at the money, then the put option with the same cost will have a higher strike price." This is from SOA sample DM questions.

See, there is just so much more to understand. I feel like such a simpleton. Did you know that from put call parity? I thought I had so much time to prepare for this exam, and I still can't believe I have more to learn. Well, I have until June 3rd anyway. I'm taking it at about the last possible moment.

sean t
May 28th 2008, 02:58 PM
yes. everything i said come directly from put call parity

stevo
June 2nd 2008, 07:55 AM
On a related note, though, why must the strike price for the put in a collar be less than the strike price of the call? Is it simply a definition? It seems to me like you could create a zero cost collar with a higher put strike price, with both put and call well in the money. I have a problem with the reasoning for problem 6 from the SOA sample questions from Derivative Markets as well. If the stock's correlation is negative, then it could actually have the effect of lowering the portfolio's risk, resulting in a lower return.

magpie
June 2nd 2008, 09:04 AM
I know it's probably too late already, but section 9.1 in the DM book is on put-call parity as well; if you're looking for a little more clarity on the topic.