A portfolio comprising an up-and-out put and an up-and-in put is equivalent to
A)A up-and-out call and a up-and-in call.
B)A vanilla call.
C)A down-and-out put and a down-and-in put.
D)A vanilla put

Question

Quizplus · Accepted Answer

A portfolio comprising an up-and-out put and an up-and-in put is equivalent to a vanilla put because the combination of these options covers all possible scenarios. If the underlying asset's price goes above a certain level, the up-and-out put becomes worthless, but the up-and-in put becomes active, ensuring coverage across all price movements, just like a standard put option.

A Portfolio Comprising an Up-And-Out Put and an Up-And-In Put