A portfolio of a long dollar call and a short dollar put at an exercise price K^€/$is equivalent to ______.

Question

Quizplus · Accepted Answer

The portfolio of a long dollar call and a short dollar put at an exercise price K^€/$ is equivalent to a long forward contract to buy dollars. This is because owning a call option gives the holder the right to buy the underlying asset at the exercise price, and owning a put option gives the holder the right to sell the underlying asset at the exercise price. Therefore, combining these two options creates a synthetic long position in the underlying asset. A long forward contract to buy dollars also creates a synthetic long position in the same asset.

A Portfolio of a Long Dollar Call and a Short