CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity
A fiduciary call is constructed by combining a European call option with:
A fiduciary call combines a long European call with a risk-free bond that pays the exercise price at expiration. At expiry the bond supplies X, so the total payoff equals the greater of the asset price and the strike, matching a protective put.
- Aa short position in the underlying asset
- Ba risk-free bond that pays the exercise price at expirationCorrect
- Ca long position in a European put with a different strike
Explanation
A fiduciary call is a long European call plus a risk-free zero-coupon bond whose face value equals the exercise price. At expiration the bond pays X, so the payoff is max(S_T, X), the same as a protective put. A short underlying position is not part of it, and a put with a different strike would not give the replication.
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