Two students are discussing the Put-Call Parity Theory: Student 1: The put-call parity holds only for European
Question:
Two students are discussing the Put-Call Parity Theory:
Student 1: The put-call parity holds only for European options. If a trader were to simply take a long position in a call option and a short position in a put option, and if the premiums exactly offset each other, the payoff profile would be identical to a long synthetic forward position in the underlying.
Student 2: You’re correct about the put-call parity holding only for European options. However, a long call and short put position without a long T-bill position will be equivalent to a long synthetic spot position in the underlying.
Which of the following best describes the two traders’ statements?
A) Student 1 is correct
B) Student 2 is correct
C) Both student 1 and student 2 are correct
D) Neither student 1 nor student 2 are correct
E) The use of the term “synthetic” is irrelevant to the students’ discussion
Expert Answer:
The detailed answer for the above question is provided below The correct answer is C Both student 1 ... View the full answer
