The PS index has the following characteristics:

• One share of the PS index currently sells for 1,000.

• The PS index does not pay dividends.
Sam wants to lock in the ability to buy this index in one year for a price of 1,025. He can do this by buying or selling European put and call options with a strike price of 1,025.

The annual effective risk-free interest rate is 5%.

Determine which of the following gives the hedging strategy that will achieve Sam’s objective and also gives the cost today of establishing this position.

(A) Buy the put and sell the call, receive 23.81

(B) Buy the put and sell the call, spend 23.81

(C) Buy the put and sell the call, no cost

(D) Buy the call and sell the put, receive 23.81

(E) Buy the call and sell the put, spend 23.81