Options - No arbitrage Assumption along

spartan1

c + (X/1+RFR)^t = S + P

Why do they use the T-bond in this case along with the call?

Flok

Ok then, with the equation: (X/1+RFR)^t

if you purchase a T-bond how is the interest shown in this formula? It simply shows the principal "X" discounted back over time.

Daniel1985

Yes, it is assuming that you are earning a risk free rate and you are discounting 'X' by that rate.

And in the US context, Treasury Securities give you risk free returns.

Siddimaula

got it thank very much.