CFA Level I · CFA Level I Exam · Option Replication Using Put-Call Parity
Compared with a protective put, a fiduciary call with the same strike, expiration and underlying most likely has:
The two positions have identical payoffs at expiration in every outcome, equal to the greater of the asset price and the exercise price. This equivalence is the basis of put-call parity, so their initial costs must also be equal.
- Aa lower payoff when the asset price falls below the strike
- Bthe same payoff at expiration in all outcomesCorrect
- Ca higher payoff when the asset price rises above the strike
Explanation
Both positions pay max(S_T, X). Below the strike, the bond pays X and the call expires worthless, while the protective put gives X. Above the strike, the call gives S_T - X plus the bond X, which equals S_T, the same as the share with the lapsed put.
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