CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity
After an arbitrageur completes a correct put-call parity arbitrage, the position at option expiry is most likely described as:
A correct parity arbitrage has offsetting terminal payoffs in every scenario, so the net payoff at expiry is zero. The profit is the mispricing captured at initiation, and it does not depend on whether the stock finishes above or below the strike.
- Aprofitable only if the stock price finishes above the strike
- Ba payoff that is zero in every state, with the profit already locked in at initiationCorrect
- Cprofitable only if the stock price finishes below the strike
Explanation
The long and short legs replicate each other, so terminal payoffs cancel whatever the stock price is. The gain is the mispricing received at initiation, which is risk-free. Options A and C describe directional bets, which an arbitrage is not.
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