Put Call Parity

Question 1

Put-Call parity relationship

Answer 1

Protective Put
(Long put, long underlaying asset)

SAME FUTURE CASH FLOW

Fiduciary call
(Long call, long risk free bond)

Question 2

Fiduciary call payoff scenarios (in the money, out of the money)

Answer 2

In the money = Market Asset

Out of the money = Risk Free bond

Question 3

Example of arbitrage strategy:
Put has it premium below than its value
Of put call parity.
What is the following strategy?

Answer 3

P < (C + Pv (X) - St)

Arbitrage

Buy Put (undervalued)
Sell Call (overvalued)

Buy asset (undervalued) : if the C+Pv(x) - St is higher than price, means St is the lower, so it tends to go UP to be equal again

Borrow at Pv (overvalued) : if the C+Pv(x) - St is higher than price, means the Pv(x) is higher than should be, so it tends to go DOWN