Finance School of management Payoff Structure for Protective Put Strategy Value of position at Maturity date Position IfSt<e Ifst>e Stock S T Put E-S Stock plus put E S07 S uesTc
11 Finance School of Management Payoff Structure for Protective Put Strategy Position If S T < E If S T > E Stock S T S T Put E - S T 0 Stock plus put E S T Value of Position at Maturity Date
Finance School of management Payoff Structure for a Pure Discount Bond plus a call Value of position at Maturity date Position IfS<E IfST>e Pure discount bond with face E E value of e Call E Pure discount bond plus call E uesTc 12
12 Finance School of Management Payoff Structure for a Pure Discount Bond Plus a Call Position If S T < E If S T > E Pure discount bond with face E E value of E Call 0 S T - E Pure discount bond plus call E S T Value of Position at Maturity Date
Finance School of management Put-Call Parity Equation Strike Call(Strike, Maturity)+ (1+r)Maturity Put(Strike, Maturity)+ she are E C P+s p uesTc 13
13 Finance School of Management Put-Call Parity Equation ( ) Put Strike Maturity Share r Strike Call Strike Maturity Maturity = + + + ( , ) 1 ( , ) ( ) P S r E C T = + + + 1
Finance School of management Synthetic securities The put-call parity relationship may be solved for any of the four security variables to create synthetic securities C=S+P-B S=C-P+B P=C-S+B B=S+P-C uesTc 14
14 Finance School of Management Synthetic Securities ❖The put-call parity relationship may be solved for any of the four security variables to create synthetic securities: − C=S+P-B − S=C-P+B − P=C-S+B − B=S+P-C
Finance School of management Converting a Put into a Call + p (1+r) 今S=$100,E=$100,T=1year,r=8%,P=$10 C=100-100/1.08+10=$1741 2 IfC=$18, the arbitrageur would sell calls at a price of S18, and synthesize a synthetic call at a cost of$17.41, and pocket the $0. 59 difference between the proceed and the cost uesTc 15
15 Finance School of Management Converting a Put into a Call ❖ S = $100, E = $100, T = 1 year, r = 8%, P = $10: C = 100 – 100/1.08 + 10 = $17.41 ❖ If C = $18, the arbitrageur would sell calls at a price of $18, and synthesize a synthetic call at a cost of $17.41, and pocket the $0.59 difference between the proceed and the cost ( ) P r E C S T + + = − 1