The combination of being long in the bond and buying a put option on a bond mimics the profit function of
A)buying a put option.
B)writing a put option.
C)writing a call option.
D)buying a call option.
E)buying a floor.

Question

Quizplus · Accepted Answer

Buying a call option gives the holder the right, but not the obligation, to buy an underlying asset at a specified price on or before a specified date. In this case, the underlying asset is a bond, and the specified price is the strike price of the put option. If the price of the bond falls below the strike price, the holder of the call option can exercise the option and buy the bond at the strike price, which is lower than the current market price. This will result in a profit for the holder of the call option.

The Combination of Being Long in the Bond and Buying