Reading 56: option replication using put- call parity

Question 1

The put–call parity relationship for European options must hold because a protective put will have the same payoff as:
a covered call.
a fiduciary call.
an uncovered call.

Answer 1

Given call and put options on the same underlying asset with the same exercise price and expiration date, a protective put (underlying asset plus a put option) will have the same payoff as a fiduciary call (call option plus a risk-free bond that will pay the exercise price on the expiration date) regardless of the underlying asset price on the expiration date. (LOS 56.a)

Question 2

The put–call-forward parity relationship least likely includes:
a risk-free bond.
call and put options.
the underlying asset.

Answer 2

The put–call-forward parity relationship is F0(T)(1 + RFR)–T + p0 = c0 + X(1 + Rf )–T, where X(1 + Rf )–T is a risk-free bond that pays the exercise price on the expiration date, and F0(T) is the forward price of the underlying asset. (LOS 56.b)