Question: You are given the following information about a securities market:
(i) There are two nondividend-paying stocks, X and Y.
(ii) The current prices for X and Y are both $100.
(iii) The continuously compounded risk-free interest rate is 10%.
(iv) There are three possible outcomes for the prices of X and Y one year from now:
| Outcome |
X |
Y |
| 1 |
$200 |
$0 |
| 2 |
$50 |
$0 |
| 3 |
$200 |
$300 |
Let C_X be the price of a European call option on X, and P_Y be the price of a European put option on Y. Both options expire in one year and have a strike price of $95. Calculate P_Y - C_X
NOTES: This is a problem almost identical to a problem from the MFE Fall 2008 exam, but a value (Outcome 3 X Price) has been changed. Also, we have not used any linear algebra (directly) in this class so I need to be able to demonstrate work that doesn't utilize linear algebra, if that's possible.