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p0
X exercise price
Initial p0
position S0
S0 + p0 Asset
S0
time
0 T
p0
X
Initial p0
position S0
S0 + p0
S0
time
0 T
Asset
ST
Put seller
p0
X PT = 0
Initial p0
position S0 Ending
position
S0 + p0
S0 ST if ST > X
time
0 T
Put seller
p0
X
Initial p0
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X
time
0 T
Put seller
p0
X
Initial p0 PT = X - ST
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X
X if ST < X
ST
time
0 T
Downside
X
truncated
Ending
position
position in X if ST < X
Payoff from long underlying
position in put
option
0 ST X
Underlying Spot Price at Expiration, ST
ST
Call seller
c0 X exercise price
c0
X/(1+rf)T
Initial
position
c0 + X/(1+rf)T Risk-free
bond
X/(1+rf)T
time
0 T
c0 + X/(1+rf)T
X/(1+rf)T
time
0 T
Risk-free
Asset
bond
ST
Call seller CT = ST - X
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T
X ST if ST > X
X/(1+rf)T
time
0 T
Call seller
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T ST
ST if ST > X
X/(1+rf)T
time
0 T
Call seller CT = 0
c0 X
c0
X/(1+rf)T
Initial
position Ending
position
c0 + X/(1+rf)T ST
X ST if ST > X
X/(1+rf)T X if ST < X
time
0 T
Ending
position
ST if ST > X
X if ST < X
0 ST X
Underlying Spot Price at Expiration, ST
X X
Ending Ending
position position
X if ST < X X if ST < X
X X
Underlying Spot Price at Expiration, ST Underlying Spot Price at Expiration, ST
Pricing of Options based on Put-Call Parity
Protective Put Fiduciary Call
Underlying Asset + Long Put Long Call + Risk-free Bond
Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T
Put seller Call seller
c0
p0 c0
p0
S0
Risk-free
Asset bond
X/(1+rf)T
S0
0 0
p0 - c0 = X/(1+rf)T - S0
S0 $90
Risk-free
Asset bond
X/(1+rf)T
S0 rf: 4%
0 3 mth 0
p0 - c0 = $99.02 - S$90
0
Given $15.00 $5.98 No-arbitrage price
S0 $90
$9.02
Risk-free
Asset bond
X/(1+rf)T
S0 rf: 4%
0 3 mth 0
- S0 = p0 - c0 - X/(1+rf)T
Short Call
- S0 = p0 - c0 - X/(1+rf)T
-$11 $1 - $3 - $10.50/(1.05)1
-$11 ≠ -$12
Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T
Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T
Put seller
p0
X
Initial p0 PT = X - ST
position S0 Ending
position
S0 + p0 ST
S0 ST if ST > X
Asset
X if ST < X
ST
time
0 T
Put seller
p0
X
Initial p0 F0(T) PT = X - ST
position S0 Ending
position
ST
Asset
X if ST < X
ST
time
0 T
Asset
ST
Put seller
p0
X
Initial p0 F0(T)
position S0 Ending
position
ST if ST > X
X if ST < X
time
0 T
Put seller
p0
X
Initial p0 F0(T)
position F0(T)/(1+rf)T Ending
F0(T)/(1+rf)T position
+ p0 ST if ST > X
No cash outlay
F0(T)/ at initiation for X if ST < X
(1+rf)T forwards
time
0 T
Initial Initial
position position
Synthetic Protective Put F0(T)/(1+rf)T
Equivalent Fiduciary Call
+ p0 c0 + X/(1+rf)T
F0(T)/(1+rf)T + p0 = c0 + X/(1+rf)T
Put-Call Parity
S0 + p0 = c0 + X/(1+rf)T