A trader buys a six-month European call option and sells a six-month European put option. The options have the same underlying asset and the same strike price K. Can you identify a forward contract that has the same payoff as the trader’s combined options position? Under what circumstances does the price of the call equal the price of the put? (HINT: In answering these questions you may find it helpful to draw charts of the payoffs or profits of the two positions.)
A trader buys a six-month European call option and sells a six-month European put option. The options have the same underlying asset and the same strike price K. Can you identify a forward contract that has the same payoff as the trader’s combined options position? Under what circumstances does the price of the call equal the price of the put? (HINT: In answering these questions you may find it helpful to draw charts of the payoffs or profits of the two positions.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A trader buys a six-month European call option and sells a six-month European put option. The options have the same underlying asset and the same strike price K. Can you identify a forward contract that has the same payoff as the trader’s combined options position? Under what circumstances does the price of the call equal the price of the put? (HINT: In answering these questions you may find it helpful to draw charts of the payoffs or profits of the two positions.)
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