Reading 74: Options Replication Using Put-Call Parity

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Book 3: Derivatives

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8 Terms

1
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What is the put-call parity comprised of?

fiduciary call

protective put

2
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Fiduciary Call

a combination of a call with exercise price K and a pure discount risk-free bond

3
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Protective Put

long the underlying and long a put option on the underlying

4
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What is the payoff if at expiration, S ≥ K?

K + (S – K) = S

5
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What is the payoff if at expiration, K ≥ S?

S + (K – S) = K

6
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Put-Call Parity formula

c + K(1+r)-T = S + p

7
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Synthetic Equivalents

rearranging the put-call parity to derive a specific variable

the securities on the right-hand side are the synthetic equivalents

8
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Put-Call Forward Parity

F0(T)(1+r)-T + p = c + K(1+r)-T