Deck 9 – Put–Call Parity · Flashcards

Question

What is put-call forward parity for European options?

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Answer

$C_{0} - P_{0} = \frac{F _{0} ( T ) - X}{( 1 + r ) ^{T}}$ .

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Question

Why do a fiduciary call and a protective put have the same price today?

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Answer

They have identical expiration payoffs, so no-arbitrage requires equal prices.

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Question

If $C_{0} + P V (X) < P_{0} + S_{0}$ , what arbitrage strategy exploits the mispricing?

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Answer

Buy call, borrow $P V (X)$ , sell put, and short underlying.

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Question

If an option is at-the-money forward, what does put-call forward parity imply about call and put prices?

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Answer

If $F_{0} (T) = X$ , then $C_{0} = P_{0}$ .

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