Question

A synthetic long call option can be created from put-call parity relation as follows:

Buy the call option, sell the stock, and sell a bond that pays the option’s exercise price at maturity

Buy the call, sell the stock, and buy a bond that pays the exercise price at maturity

Sell the call, buy the stock, and sell a bond that pays the exercise price at maturity

Buy the stock, buy the put, and sell a bond that pays the option’s exercise price at maturity None of the above

Answer 1

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As per put-call parity

P+ S = present value of X + C

P= value of put option.

S= current price of the share

X= strike price

C= value of call option.

Present value of X = X/(1+r)

r = risk free rate.

Long Put + Long Stock = Long Risk-free Bond+ Long Call

Long Call = Long Put + Long Stock+ Short Risk-free Bond.

Answer: Buy the stock, buy the put, and sell a bond that pays the option’s exercise price at Maturity.