A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to
A) A short position in a call option
B) A short position in a put option
C) A long position in a put option
D) None of the above

Question

Quizplus · Accepted Answer

Suppose that S_T is the final asset price and K is the strike price/forward price.A short forward contract leads to a payoff of K−S_T.A long position in a European call option leads to a payoff of max(S_T−K,0).When added together we see that the total position leads to a payoff of max(0,K−S_T),which is the payoff from a long position in a put option.C can also be seen to be true by plotting the payoffs as a function of the final stock price.

A Short Forward Contract on an Asset Plus a Long