[ 2009 FRM Sample Exam ] Market risk measurement and management Q5 management, continuous, following, counter, price

Babul

 

5. Jim is an arbitrage trader who wants to calculate the implied dividend yield on a stock using the over?the?counter prices of a 5?year European put and a European call on the same stock. He has the following datA

Initial stock price = USD 85

Strike price = USD 90

Continuous risk?free rate = 5%

Underlying stock volatility = unknown

Call price = USD 10

Put price = USD 15

What is the continuous implied dividend yield of the stock?

A. 2.48%

B. 4.69%

C. 5.34%

D. 7.71%

Babul

 

Correct answer is Cfficeffice" />

We can use the Put?Call parity here to easily solve for the continuous dividend yield.  We have C ? P = S0e-q*T ? Ke-r*T, so 10 ? 15 = 85e-q*5 ? 90e-0.05*5.  Solving for q, we get 5.34%.

ffice:smarttags" />Readings: Options, Futures and Other Derivatives, John C. Hull, 5th edition, Prentice Hall, 2002, Chapter 12.

Type of Question: Market Risk