Skip to content

FRM Part I · FRM Exam Part I · Options Markets

Which statement about put-call parity for European options on a non-dividend-paying stock is correct?

Put-call parity says a stock plus a European put has the same payoff as a European call plus a zero-coupon bond with face value equal to the strike, so p + S = c + PV(K). It requires the same strike and expiry and does not hold exactly for American options.

  1. AA protective put equals a call plus a bond paying the strike at expiry, so p + S = c + PV(K)Correct
  2. BA covered call equals a put plus a bond paying the strike at expiry, so c + S = p + PV(K)
  3. CThe relation also holds exactly for American options because early exercise is never optimal
  4. DThe relation requires the call and put to have different strikes but equal expiries

Explanation

Stock plus a put pays max(S_T, K) at expiry, as does a call plus a zero-coupon bond of face K. Hence p + S = c + PV(K). American options only satisfy inequalities because early exercise of puts can be optimal, and parity requires the same strike and expiry.

Did you get it right without looking?

One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.

Practise Options MarketsFree diagnostic mock

More Options Markets questions