In the put-call parity formula, the present value of the exercise price is computed using the:
A) nominal market rate.
B) real market rate.
C) real inflation rate.
D) nominal inflation rate.
E) risk-free rate.

Question

Quizplus · Accepted Answer

The present value of the exercise price in the put-call parity formula is computed using the risk-free rate. This is because the exercise price represents a future cash flow that needs to be discounted to its present value using a rate that is considered risk-free. The risk-free rate is an important input in determining the fair value of options and derivatives.

In the Put-Call Parity Formula, the Present Value of the Exercise