Option Replication Using Put-Call PArity

Question 1

What is a protective put

Answer 1

Investor purchasing Long Stock (So)
+ Put Option (Po)
Exercise price = X, Maturity = T

Cost today = So + Po
Payoff at T = Max (

Question 2

Fiduciary Call

Answer 2

Call + Present value of strike price
View PV of Strike Price as zero coupon bond that will expire at maturity and pay out strike price.

Question 3

What is the similarities of them?

Answer 3

PP and FC will both have similar values at maturity

Question 4

What is the put call parirty formula?

Answer 4

Imagine the investor buys
1) a call Option = Co; maturing = T, Exercise price = X
2) Purchases a zero coupon bond = Pays X, Maturity = T

Cost today = Co + PV(x)

Question 5

What’s the payoff at T of the Fiduciary Call?

Answer 5

Option: Max (X,St)

Question 6

What is put call parity

Answer 6

(FC) Co + PV(X) = So + Po (PP)

Question 7

What happens if the formula doesn’t hold

Answer 7

You can make an arbitrage profit

Question 8

How do you replicate an underlying price

Answer 8

Co (Long Call) + PV(X) (Long risk free bond) - Po (Short put)

Question 9

How do you calculate the price of PV(x) The risk free bond

Answer 9

Long Underlying + Long Put - Short Call

Question 10

What are the other calculations?

Answer 10

S = c − p + X(1 + Rf)–T

p = c − S + X(1 + Rf)–T

c = S + p – X(1 + Rf)–T

Question 11

What is put call forward parity?

Answer 11

So is the price today of underlying asset at t=0
When we reach t=T, so -> St
We can synthetically we can substitute the long position in underlying, we can enter a long position in the forward contract (no cash cash outlay)