- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 9. Option Replication Using Put-Call Parity
- Subject 2. Put-Call-Forward Parity
CFA Practice Question
To create a synthetic forward contract, we should ______.
B. short a call, long a put, and long a risk-free bond
C. long a call, short a put, and long or short a risk-free bond
A. long a call, short a put, and long a risk-free bond
B. short a call, long a put, and long a risk-free bond
C. long a call, short a put, and long or short a risk-free bond
Correct Answer: C
The synthetic forward contract would have an initial value of c0 - p0 + [X - F(0, T)]/(1 + r)T. If X - F(0, T) > 0, we would long the bond; if X - F(0, T) < 0, we would short the bond. If X = F(0, T), then the bond is out of the picture.
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