At time = 0, for a CALL option at exercise price (X) on a newly issued forward c
ID: 2806408 • Letter: A
Question
At time = 0, for a CALL option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in:
a put at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.
a risk-free pure-discount bond that pays FT – X at option expiration and short in a put at X.
a put at X and long in a pure-discount risk-free bond that pays FT – X at option expiration.
the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.
A.a put at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.
B.a risk-free pure-discount bond that pays FT – X at option expiration and short in a put at X.
C.a put at X and long in a pure-discount risk-free bond that pays FT – X at option expiration.
D.the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.
Explanation / Answer
At time = 0, for a CALL option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.
Option (D) is correct answer.
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