The put-call-spot parity relationship involves four different securities: the underlying asset, a call option on that asset,
Question:
The put-call-spot parity relationship involves four different securities: the underlying asset, a call option on that asset, a put option, and a T-bill. Explain how it is possible that one of those assets is always redundant (that is, can be expressed in terms of the other three). Discuss the transactions that would be necessary to make the call option in this situation the redundant asset.
Step by Step Answer:
The putcallspot parity relationship can be expressed as Long Stock Long Put Short ...View the full answer
Investment Analysis and Portfolio Management
ISBN: 978-1305262997
11th Edition
Authors: Frank K. Reilly, Keith C. Brown, Sanford J. Leeds
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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