Q6 Ans.png - Question What position is equivalent to a long...

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Unformatted text preview: Question: What position is equivalent to a long forward contract to buy an asset at on a certain date and a put option to sell it for on that date? Answer: The long forward contract provides a payoff of ST — Kwhere ST is the asset price on the date and K is the delivery price. The put option provides a payoff of max (K—ST, 0). If ST > Kthe sum of the two payoffs is ST — K. If ST < K the sum of the two payoffs is o. The combined payoff is therefore max (ST — K, o). This is the payoff from a call option. The equivalent position is therefore a call option. ...
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