CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity
At expiration, an investor holds a protective put on a share, with exercise price X. Compared with holding the share alone, the protective put position most likely:
A protective put has a minimum payoff of X and unlimited upside. Its payoff at expiration equals the larger of the share price and the exercise price, because the put offsets losses below X while gains above X are kept.
- Ahas a minimum payoff of X and retains unlimited upsideCorrect
- Bhas a maximum payoff of X and retains full downside
- Chas a payoff always equal to the share price plus X
Explanation
Payoff is S + max(0, X - S) = max(S, X). The floor is X and upside is unlimited. The second option describes a capped position, which is wrong, and the third adds X incorrectly.
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