You wish to create a synthetic equity position. You believe that the price of the stock will decrease over the next year. You have the following securities available to you to create this position. Note that all options are European and Beetroot Inc does not pay dividends.

Current Value of Available Securities

Beetroot Inc. Equity: $10.00

Call Premium: $ 5.31

Put Premium: $ 0.50

Strike for Call or Put: $14.00

Call and Put Expiration: 1 year

Annual Risk-Free Rate (annually compounded): 3% per year

1. Confirm that the put-call parity holds in this case.
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3. Specifically, identify the transactions that you will enter into to create your position?
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5. At expiration, the value of the equity will have increased or decreased. Show how your synthetic position will have the same payoff as a stock-only portfolio. Show this if Beetroot Inc’s equity if the equity value increases to $100 or decreases to $5.

Answer rating: 100% (QA)

Putcall Parity is the principal that defines the relation between put and call ... View the full answer