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- Topic: the relationship between call, put and forward. pls help
|Author||Topic: the relationship between call, put and forward. pls help|
|As we learned from study notes -
1. "short put” means “the obligation to buy the underlying asset”.
2. usually, there is ” long call + short put = forward”
My question is: as short put refers to the obligation to buy, why can’t we say that short put = forward directly?
Thanks in advance!
|A short put is an obligation to buy only when the owner of the put chooses to exercise it. Assuming that the put owner is rational, he will do this only when it is favorable to him.
A long position in a forward (or future) contract is also an obligation to buy, but it is not conditional on the short exercising their choice to sell: they are obligated to sell, whether it is favorable to them or not.
The long position in a forward or future can gain if the price rises. The short position in a put option cannot gain if the price rises. (Unless the put owner is a moron.)