Question

The premiums for 3 month call and put options on euros are listed below: Strike price Call Put $1.25 $0.06 $0.02 The interest rate in dollars is 4% per annum. (That will be 1% for a 3 month period.) What is the 3 month ahead forward rate that is consistent with put call parity

Answer 1

1.2904

Step-by-step explanation:

S + P = C + X/(1+r)^n

S = ?, P = Premium of put 0.02, C = Premium of call 0.06, X = Strike price (1.25), r = 4%, n = 1.25 (3/12)

S + 0.02 = 0.06 + 1.25/(1.04)^0.25

S = 0.06 + 1.2378 - 0.02

S = 1.2778

F = S(1+r)^n

F = 1.2778*(1.04)^(3/12)

F = 1.2778*1.009853

F = 1.2903901634

F = 1.2904

So, the 3 month ahead forward rate that is consistent with put call parity is 1.2904.