If this was addressed somewhere else, feel free to redirect me. I was unable to find in a search. Why is it that the Schweser Qbank answers some put call parity questions using Xe^-rt for the strike portion of the put call parity equation but uses X/(1+r)^t in other questions? Thanks ahead for any help.
Nevermind - figured it out, continuous compounding.
it depends if you are using continuous compounding or not… for short time periods, these should both get you answers that are relatively close.
as t increases (1+r)^t -> e^rt 1.05^0.25 = 1.01227 e^0.05*0.25=1.012578
"as t increases (1+r)^t -> e^rt " it should be, as n increases, (1+r/n)^nt -> e^rt. the relationship says that if the frequency of the period of compounding goes up, the limit is the continuously compounded rate. it doesnt have much to do with the length of the time period t, which can by anything - a month, a year, 15 years
Mobius is correct.