Question

1- Why should the prices of the call and stock equal the prices of the put and bond?

2-why did the sale of so many credit default swaps make a bad solution much worse ?

Answer 1

1) As per Put call parity rule, the following equation hold ture

Call option + Bond(i.e., PV of Exercise price invested) = Share + Put option

For Example share price today 100 and after 3 month 150 then both will result same.

LHS:- Call option -50 (150-100) and Bond will turn to 100 so Rs 150

RHS:- Share worth 150 and Put option - 0 so total Rs150

So the concept mentioned in question in incorrect

2) Since we need to pay premium for Purchasing Credit default swaps and we know that share price will fall due to credit default.