Explain the call-put parity relation and how it is justified. (50 marks) Black-Scholes-Merton formula uses...
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Explain the call-put parity relation and how it is justified. (50 marks)
Black-Scholes-Merton formula uses five variables to calculate the price of call and put options. Explain each of these variables incorporated in Black-Scholes-Merton formula. Show how the change in these variables affects the price of option. Show how these variables are grouped to show put-call parity relationship and suggest the condition in which there is an arbitrage opportunity. (50 marks)
(Note: Explain in detail with an example)
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