Finance School of management Put-Call Arbitrage Immediate Cash Flow at Maturity date Position Cash flow IfST<$100 Ifst>$100 Sell a call $18 0 -(Sr-$100 Buy Replicating Portfolio Synthetic Call buy a stock ($100) Borrow the present value of $100 $92.59 (S100($100 buy a put ($10) $100-S 0 Net cash flows $0.59 uesTc 16
16 Finance School of Management Put-Call Arbitrage Immediate Position Cash Flow Sell a call $18 0 - (S T - $100) Buy a stock ($100) S T S T Borrow the present value of $100 $92.59 ($100) ($100) Buy a put ($10) $100 - S T 0 Net cash flows $0.59 0 0 Cash Flow at Maturity Date If S T < $100 If S T > $100 Buy Replicating Portfolio (Synthetic Call)
Finance School of management Options and Forwards We saw in the last chapter that the discounted value of the forward was equal to the current spot .o The relationship becomes E C+ (1+r) F-E C=P+ (1+r) uesTc
17 Finance School of Management Options and Forwards ❖ We saw in the last chapter that the discounted value of the forward was equal to the current spot ❖ The relationship becomes ( ) T T r F P r E C 1 (1+ ) = + + + T r F E C P (1+ ) − = +