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CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity

An investor holds a European call option on a non-dividend-paying share and also holds a zero-coupon bond whose face value equals the option's exercise price and which matures on the option's expiration date. This combined position is best described as a:

The position is a fiduciary call. It pairs a long European call with a risk-free zero-coupon bond maturing at expiration with face value equal to the exercise price, so the payoff is at least the exercise price while upside participation remains through the call.

  1. Aprotective put
  2. Bfiduciary callCorrect
  3. Ccovered call

Explanation

A fiduciary call combines a European call with a risk-free bond that pays the exercise price at expiration. This guarantees at least the exercise price at expiry while retaining upside. A protective put combines the underlying asset with a put, and a covered call combines the asset with a short call.

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