Hi,
I’ve just done a couple of put/call parity questions asking to value a call or put option. No where in the question did it say there was a continuous compounding rate, but the answer used C0 + Xe^(-rt) = P0 + S0
The only thing I can think of for this is because the option was being valued using Black Scholes…so is it that if we are using binomal we use 1/(1+R)^t but if its black scholes then e^(-rt)?
wow, never seen it used with continuous compounding. humm
it is not binomial or black scholes.
it is continuously compounded (e^rt) or discretely compounded (1+r)^t.
typically in Option’s pricing Schweser tends to use Continuous compounding.
Just be aware that wherever you use (1+r)^t e^rt can also be used.
Also be aware that both ways should give you answers that are pretty close to each other.
And just so you know e^(-rt) = 1/(1+r)^t
cpk, e^(-rt) NOT= 1/(1+r)^t but close sometimes.
e^(-rt) = x
-rt LN e = LN x
-rt = LN x
5% return, for quarter year
e^(-0.05 * 0.25) = 0.9875778
1/(1+0.05)^0.25 = 0.987876547
the answer i got using discrete werent very close to the continuous. I got 1.32 and answer was 1.41 or something along those line…BUT the other answers were no where near mine so i just picked the 1.41 as it was closest.
will just have to remember to use continuous as a check if my discrete answer doesn’t pop up