CFA Practice Question

CFA Practice Question

Stock A is priced at $50, a call on stock A with strike price $54 and maturity in 6 months is priced at $3, and a put on stock A with strike price $54 and maturity in 6 months is priced at $10. The riskless rate for 6 months is 2.1% (not annualized). Assume that you can purchase any fractions of riskless bonds that you like, and there are no transactions costs. Refer to the stock and derivatives above. In setting up the riskless arbitrage you will have:
A. Long Stock A; and Long Call
B. Long Stock A; and Short Call
C. Short Stock A; and Long Call
Explanation: The synthetic portfolio that replicates the payoff of one stock is [+1 Call, -1 Put, Bonds of FV K/(1+r)] The price of a synthetic portfolio = $3 - $10 + ($54/1.021) = $45.89. So short N units of the stock and buy N units of the synthetic portfolio.

User Contributed Comments 2

User Comment
praj24 My mind just can't seem to process this :(
Ngana Also me
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