A portfolio comprising a long call and a short put option has the same payoff as:

A portfolio comprising a long call and a short put option has the same payoff as:
A . a long underlying asset and a short bond position
B . a short underlying asset and a short bond position
C . a long underlying asset and a long bond position
D . a short underlying asset and a long bond position

View Answer

Answer: A

Explanation:

To answer this question, we need to look at the put-call parity, which can be expressed as:

Value of call – Value of put = Spot price – Exercise price discounted to the present or, Value of call – Value of put = Stock – Bond with a future value equal to exercise price Therefore, a long call and a short put is equivalent to a long stock position and a short bond.

Choice ‘a’ is therefore the correct answer. (Alternatively, we could also have constructed a graph of the payoff profiles to arrive at the same answer).