Question #28
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 13
Status: Unattempted
Question
Referring to put-call parity, which one of the following alternatives would allow you to create a synthetic European call option?
Answer Choices:
A. Sell the stock; buy a European put option on the same stock with the same exercise price and the same maturity; invest an amount equal to the present value of the exercise price in a pure-discount riskless bond
B. Buy the stock; sell a European put option on the same stock with the same exercise price and the same maturity; short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond
C. Buy the stock; buy a European put option on the same stock with the same exercise price and the same maturity; short an amount equal to the present value of the exercise price worth of a pure-discount riskless bond
Explanation
According to put-call parity we can write a European call as: C0 = P0 + S0 – X/(1+Rf)T
We can then read off the right-hand side of the equation to create a synthetic position in
the call. We would need to buy the European put, buy the stock, and short or issue a
riskless pure-discount bond equal in value to the present value of the exercise price.