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All main topics / Finance & Investment / Derivatives / Derivatives
18
A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to
A. A short position in a call option
B.A short position in a put option
C. A long position in a put option
D.None of the above
Answer: C
Suppose that ST is the final asset price and K is the strike price/forward price. A short forward contract leads to a payoff of K−ST. A long position in a European call option leads to a payoff of max(ST−K, 0). When added together we see that the total position leads to a payoff of max(0, K−ST), which is the payoff from a long position in a put option. C can also be seen to be true by plotting the payoffs as a function of the final stock price. 
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

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