Question #37
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 16
Status: Unattempted
Correct Answer: A
Question
Referring to put-call parity, which one of the following alternatives would allow you to create a synthetic riskless pure-discount bond?
Answer Choices:
A. Sell a European put option; sell the same stock; buy a European call option
B. Buy a European put option; sell the same stock; sell a European call option
C. Buy a European put option; buy the same stock; sell a European call option
Explanation
According to put-call parity we can write a riskless pure-discount bond position as:
X/(1+Rf)T = P0 + S0 – C0
We can then read off the right-hand side of the equation to create a synthetic position in
the riskless pure-discount bond. We would need to buy the European put, buy the same
underlying stock, and sell the European call.