I know calculating option prices using black-scholes is outside the scope of the exam, but I came across this question and was interested in how to approach it.
The following information on an option contract is presented:
Time to expiration: 185 days
Current share price: $200
Standard deviation: 20% per annum
Risk free rate: 10%
Dividend yield: 10%
The question asked how to calculate the price of a call option which is easy, but then it asks to calculate the price of a put using put-call parity. What do you do with the dividend in the put-call parity formula?
In the put call parity you deduct the dividend value from the price of the stock. This calculation is in fact covered in the curriculum, take a look on the index.
In the CFA L2 curriculum btw, you are L1 candidate yet. Perhaps you going too forward right now?
Yes I know its not covered in L1, was just curious.
So would the dividend be 20?
Yes, 10% dividend yield is 20$.
Would you then discount the dividends the same way you would a bond in the put call parity formula assuming interest is continuous?
Yup, exactly the same, just be careful about the number of days indicated.