we have originally c + x/(1+rfr)t = p + s
why do we replace s by so - PV (cash flows) ?
Shouldnt we deduct the PV (cashflows) from S to make it equal to the beginning value of so?
we have originally c + x/(1+rfr)t = p + s
why do we replace s by so - PV (cash flows) ?
Shouldnt we deduct the PV (cashflows) from S to make it equal to the beginning value of so?
1 more q. if cash flows are expected in future to increase in an asset
will call increase or put increase ?
S is the value of the stock. If the Stock is going to provide you dividends (Cashflows) in the future - the PV of Cashflows is an inflow to you. So essentially the Stock value today would be S - PV(Cashflows) since the stock value is determined among other things by the CAshflows themselves. Cashflows increase -> S increases.
as regards the other question:
C = P+(S-PV(CF)) - X/(1+rfr)^t
CF Increases -> RHS decreases -> Call value decreases
P = C + X/(1+rfr)^t - (S-PV(CF))
CF Increases -> the PV(CF) is subtracted from S -> a smaller value is subtracted so P Increases.
thaks so if cashinflows increase, call reduces