Put-call parity is given by: long stock + long put = long call + risk-free
zero coupon bond. Hence a risk-free zero coupon bond (a risk-free
position) can be created as follows: long stock + long put + short call.
Derivatives MCQ - Derivatives Section 2
Put-call parity is given by: long stock + long put = long call + long bond.
Hence a synthetic put can be created as follows: long call + long bond –
short stock.
- A The put price plus the value of a risk-free bond with face value equal to the forward price equals the call price plus the value of a risk- free bond with face value equal to the exercise price.
- B The put price plus the value of a risk-free bond with face value equal to the exercise price equals the call price plus the value of a risk-free bond with face value equal to the forward price.
- C The put price plus the value of a risk-free bond with face value equal to the forward price equals the call price minus the value of a risk-free bond with face value equal to the exercise price.
According to put-call-forward parity, the put price plus the value of a riskfree bond with face value equal to the forward price equals the call price
plus the value of a risk-free bond with face value equal to the exercise
price.
The up and down factors express how high and how low the underlying
can go. Standard deviation does not appear directly in the binomial model,
although it is implicit.
The actual probabilities of the up and down moves are irrelevant to pricing
options.
