8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

The price of a treasury bill can be calculated as [Future value / (1 + yield x days-to-maturity/365)] = 100/(1+5%*90/365) = $98.78.

We know from the put-call parity that:

Call - Put = Stock - Deposit

In the given situation,

Stock price = 100

call = 35

Put = ?

Exercise price = 100

However, we cannot use the stock price as-is, we need to adjust it for dividends that will be received during the period for which the option is valid. Dividends are $1, which need to be discounted to the present. In financial theory, dividends are often assumed to be continuously paid, though in reality they are single discrete payments at points in time. In this situation, for simplicity we assume that the dividend is paid at the end of the year, and needs to be discounted to the present and deducted from the spot price.

Therefore:

Stock price adjusted for dividends = $100 - ($1/1.05) = $100 - $0.95 = $99.05

Similarly, the bank deposit amount, which is the PV of the exercise price, can be calculated as $100/1.05 = $95.24

We can now calculate the price of the put by plugging the numbers above in the put-call parity:

35 - Put = $99.05 - $95.24

Therefore the value of the put = 31.19, which is closest to 31.20 which therefore is the correct answer.

It is important to note the distinction between the clearing house and the exchange itself. The clearing house does not get involved with physical delivery, nor does it provide any dispute settlement services. It only makes sure that cash is settled as and when due between the members. Therefore Choice 'c' is the correct answer