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Basic Question 2 of 9
Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same exercise price. What will be the value of his investment on the final exercise date?
B. Equal to the exercise price regardless of the stock price
C. Equal to zero regardless of the stock price
D. Below the exercise price if the stock price rises and above if it falls
A. Above the exercise price if the stock price rises and below the exercise price if it falls
B. Equal to the exercise price regardless of the stock price
C. Equal to zero regardless of the stock price
D. Below the exercise price if the stock price rises and above if it falls
User Contributed Comments 9
| User | Comment |
|---|---|
| Alastair | [stock price] + Max{0,[excercise price - stock }price] - Max{0,[stock price - exercise price} = S + 0 - S + X = X Or S + X - S + 0 = X |
| antarctica | put-call parity: S+P-C = X/(1+R)^T => final date: X |
| Rotigga | Buy underlying stock + Long put + Short call Suppose that Exercise price is at $105 Scenario 1: Underlying Stock < Exercise Price Suppose underlying stock is worth $100 on the final exercise date Value: Underlying stock + Long put + Short call Value = $100 + $5 + $0 = $105 = Exercise Price Scenario 2: Underlying Stock > Exercise Price Suppose underlying stock is worth $110 on the final exercise date Value: Underlying stock + Long put + Short call Value = $110 + 0 + (-$5) = $105 = Exercise Price |
| frankannor | This is put-call parity at maturity |
| mchu | c0 + X/(1 + r)T = p0 + S0. Thus, at day 0, p0 + S0 - c0 = X/(1 + r)T at expiration=X |
| harpalani | Thanks Rotigga! Crystal clear! |
| gill15 | Seriously...that was crystal clear....guys make it simple P + S - C = X / (1 + R) what is the right side --- THE BOND --- BUY a BOND The right side the Bonds value will be X regardless of what happens.... |
| bbadger | When thinking about synthetics, think about the call. If you buy a call, sell a put you're long the synthetic. Sell a call, buy a put = short the synthetic. |
| Shaan23 | Gill you're awesome |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
Learning Outcome Statements
explain put-call parity for European options
CFA® 2024 Level I Curriculum, Volume 5, Module 9.