CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity
An analyst wants to replicate a long position in a European put option using put-call parity on a non-dividend-paying stock. Which combination is most appropriate?
A long put is replicated by a long call, a short position in the stock and a long zero-coupon bond with face value equal to the strike, from p = c - S + X/(1+r)^T.
- ALong call, long stock, short zero-coupon bond with face value equal to the strike
- BShort call, short stock, long zero-coupon bond with face value equal to the strike
- CLong call, short stock, long zero-coupon bond with face value equal to the strikeCorrect
Explanation
Rearranging parity, p = c - S + X/(1+r)^T. This is a long call, a short stock and a long zero-coupon bond. The first option has the stock and bond signs reversed and would replicate the negative of the put.
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