A description least likely to explain put-cal parity is: 1) A fid. call option strategyand a protective put option strategy for an underlying asset are equal in value 2) A put is equivalent to a long call, a long position in the underlying and a long position in the risk-free asset 3) A call is equilavent to a long put, a long position in the underlying and a short positon in the risk-free asset. I say 2; Answer is 3, but how? Their reasoning is that: “the put requires a short positoin in the RF asset.” Doesn’t this describe answer 2? I think this is wrong.
long call = long put and long in underlying. being long the call gives you the right to acquire the asset, where you want to be if you’re bullish not sure how the risk free asset factors into this…
The proof to 2 is: C + RFA = S + P => P= C + RFA - S Am I missing something here?
THE ANSWER IS C… c = p + s - x/(1+r)^t
DustyBallz Wrote: ------------------------------------------------------- > The proof to 2 is: > > C + RFA = S + P > > => P= C + RFA - S > > Am I missing something here? See that NEGATIVE sign before S. Negative denotes a short position meaning you are selling it. The positive denotes long position. I think now you will understand. A word of caution for Put-Call parity. Sometimes you need to calculate things, and the question might say that the call and put is of 6 month duration and the annual risk free rate is 6%. You need to convert the annual RFR to 6 months to do the calculation. In this case it would be discount rate=(1+0.06)^.5-1=2.96%.
Kh.asif, ALL, The question is LEAST LIKELY! 1 and 3 appear as the correct description of Put -Call parity (IMO). Dami, CFAtown what do you say here?
Oh, this is 93. CFA mock PM, I remembered the question, I marked B, too and answers said C. I was confused and forgot that the question was really “least likely”. The answer made me think it was “most likely” question. I think that the explanation in the answer book of the mock says it all, the correct answer is B. It means that number of my wrong answers in cfa mock pm dropped by 7,7 %. so long put = long call + short stock + long rf asset
Even I had the same doubt as DustyBallz Q. 93 from CFA mock afternoon paper. I am sure the answer is 2, need to look for errata. kh.asif: with above discount rate do we need to discount for both European & American call and put options?
pfcfaataf Wrote: ------------------------------------------------------- > so long put = long call + short stock + long rf > asset So by that logic is it correct that long call = long put + long stock + long rf asset?
no, long call = long put + long stock + short rf asset you cannot own the stock and the rf asset at the same time. you buy a stock and finance it by selling/issuing a bond (rf asset).
pfcfaataf Wrote: ------------------------------------------------------- > no, > long call = long put + long stock + short rf > asset > > you cannot own the stock and the rf asset at the > same time. you buy a stock and finance it by > selling/issuing a bond (rf asset). That explains a lot, thanks!
Auro Wrote: ------------------------------------------------------- > Even I had the same doubt as DustyBallz > > Q. 93 from CFA mock afternoon paper. I am sure the > answer is 2, need to look for errata. > > kh.asif: with above discount rate do we need to > discount for both European & American call and put > options? Firstly I apologize for not looking at the question properly. It is surely an errata and Dusty got it correct in the beginning. Need to be more careful in the actual exam. The discount rate adjustment is needed to discount the risk free return denoted by X. C + (X/1+r)=P + S it is the r below X. Look at the example in Schweser or CFAI book and you will understand. European or American would not matter.
My simple rule for explanation of Put-Call Parity is as follows. c+X = p+S Solve this equation for any variable e.g. c = p + S - X or p = c + X - S Now the point to remember: variable with +ve sign is to be “long” and variable with -ve sign is to be “short”. Just try this and tell whether i am thinking right? (for simplicity sake of equation i have not mentioned in equation that X should be discounted appropriately).
I’m 99.9% positive the answer is incorrect…it should be B)…CFAI hasn’t updated the errata yet though.
I agree with sa.86. Protective put= Fiduciary call Put + Underlying = Call + Risk free asset Put= Call+ risk free asset - underlying Since B has + the underlying, it’s incorrect. It’s basic algebra. Clearly you all got it, but CFA hasn’t I suppose.