Buying the stock and the put option on the stock provides the same payoff as
A)investing the present value of the exercise price in T-bills and buying the call option on the stock.
B)short-selling the stock and buying a call option on the stock.
C)writing (selling)a put option and buying a call option on the stock.
D)a T-bill.

Question

Quizplus · Accepted Answer

Investing the present value of the exercise price in T-bills and buying the call option on the stock is equivalent to buying the stock and the put option on the stock. They both provide the same payoff because the stock and the put option provide downside protection while investing in T-bills provides risk-free return. Buying the call option on the stock allows for upside potential, completing the equivalent payoff.

Buying the Stock and the Put Option on the Stock