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Question of the Week – Derivatives

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    • Avatar of AdaptPrepAdaptPrep
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        • Undecided
        16 May 2018 at 7:08 am
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        A synthetic call can be created with a long put, long stock,
        and short bond.

        We are given:

        • P0 = $15 (put price at time 0)
        • S0 = $70 (stock price at time 0)
        • X = $80 (strike price)
        • r = 3% (risk-free rate)
        • T = 1 (1 year)

        Plug this into the synthetic call formula (derived from
        put-call parity):

        C0 = P0 + S0 – X / (1 + r)^T

        = 15 + 70 – 80 / (1 + 0.03)^1

        = $7.33

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