Creating Synthetic Securities Using Put-Call Parity

Creating Synthetic Securities Using Put-Call Parity -...

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Unformatted text preview: 20-1Creating Synthetic Securities Using Put-Call ParityRisk-free portfolio could be created using three risky securities:stock, a put option, and a call optionWith Treasury-bill as the fourth security, any one of the four may be replaced with combinations of the other three20-2Adjusting Put-Call Spot Parity For DividendsThe owners of derivative instruments do not participate directly in payment of dividends to holders of the underlying stockIf the dividend amounts and payment dates are known when puts and calls are written those are adjusted into the option prices(long stock) + (long put) + (short call) = (long T-bill) + (long present value of dividends)20-3Put-Call-Forward ParityInstead of buying stock, take a long position in a forward contract to buy stockSupplement this transaction by purchasing a put option and selling a call option, each with the same exercise price and expiration dateThis reduces the net initial investment vs. buying the stock in the spot marketThe difference between put and call 20-4...
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This note was uploaded on 01/19/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Creating Synthetic Securities Using Put-Call Parity -...

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