1. Put-call parity example 2
Several years ago, the Australian firm Bond Corporation sold some land that it owned near Rome for $110 million and as a result boosted its reported earnings for that year by $74 million. The next year it was revealed that the buyer was given a put option to sell the land back to Bond for $110 million and also that Bond had paid $20 million for a call option to repurchase the land for the same price of $110 million.
1. What happens if the land is worth more than $110 million when the options expire? What if it is worth less than $110 million?
2. Assuming that the options expire in one year, what is the interest rate?
3. Was it misleading to record a profit from selling the land?

2. Solution
1. If the land is worth more than $110 million, Bond will exercise its call to buy it. If the land is worth less than $110 million, the land buyer will exercise its put to sell it (to Bond). Either way, Bond will end up owning the land again.
2. Use put-call parity:
St + Pt − Ct = Xe−r(T−t)
e−r = 110
r = .20
3. Bond will end up owning the land again after the options expire. Bond did not really sell the land and so should not declare a profit from selling it. Bond effectively just borrowed money, it did not sell an asset.