CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

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?

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
Correct Answer: B

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
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