CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

In the BSM model for a call option, d1 is calculated as -0.49 and d2 is 0.58. If you want to replicate the call option payoffs with stocks and zero-coupon bonds, you should long ______.
A. stocks and short bonds
B. bonds and short stocks
C. stocks and bonds
Explanation: To replicate the call options you should long stocks and short bonds. In this case you should long N(d1) stocks and short N(d2) bonds. Note N(d1) = N(-0.49) = 1 - N(0.49).

User Contributed Comments 2

User Comment
cminor Put call parity formula.
mtsimone You're right, @cminor. If you get hung up on d1 and d2 it's just a distraction. Put/Call keeps it simple.
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