tycoon

Which of the following best explains put-call parity?

A) No arbitrage requires that using any three of the four instruments (stock, call, put, bond) the fourth can be synthetically replicated.

B) A stock can be replicated using any call option, put option and bond.

C) A stock can be replicated using any at the money call and put options and a bond.

D) No arbitrage requires that only the underlying stock can be synthetically replicated using at the money call and put options and a zero coupon bond with a face value equal to the strike price of the options.

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Answer and Explanation

A portfolio of the three instruments will have the identical profit and loss pattern as the fourth instrument and therefore the same value by no arbitrage. So the fourth security can be synthetically replicated using the remaining three.