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 stock price goes above a certain level (the barrier), the up-and-out put becomes worthless, but the up-and-in put becomes active, ensuring coverage above the barrier. If the stock price never surpasses the barrier, the up-and-out put remains active, covering the stock price movements below the barrier. This combination ensures that regardless of how the stock price moves, the investor is covered, just like with a standard (vanilla) put option, which does not have a barrier and provides the right to sell at a certain price.

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