Problem: The Dow Jones Industrial Average on December 22, 2009 was 10,464 and the price of the March 100 call was $5.00. Assume the risk-free rate is 3.2%, the dividend yield is 2% and the option expires on February 20, 2010. (Note that the options are on the Dow Jones Index divided by 100.)
Q1: Use Derivagem to calculate the implied volatility of the call option.
Q2: Use put-call parity to estimate the no arbitrage price of a March 100 put.
Q3: Given the price determined in Q2, use Derivagem to calculate the implied volatility of the put option.
Q4: What do you conclude about put-call parity and implied volatility for European options?