Derivatives - Derivatives Section 2
- Option : A
- Explanation : 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.
57. Which of the following transactions is the equivalent of a synthetic long put position?
- Option : C
- Explanation : 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.
58. According to put-call-forward parity, which of the following relationships hold?
- 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.
- Option : A
- Explanation : 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.
59. In a binomial model, the volatility of the underlying is directly represented by the:
- Option : B
- Explanation : 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.
60. Which of the following statements is most accurate? In a binomial model:
- Option : C
- Explanation : The actual probabilities of the up and down moves are irrelevant to pricing options.
