Buying a stock and a put option, and lending the present value of the exercise price provide the same payoff as buying a call option.

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Quizplus · Accepted Answer

This is known as the put-call parity principle, which is a basic concept in options trading. It states that the price of a call option and a put option with the same strike price, expiration date, and underlying asset will be equal when certain assumptions are met. One of these assumptions is that the risk-free interest rate is constant and known. Therefore, buying a stock and a put option, and lending the present value of the exercise price (also known as a protective put strategy) will provide the same payoff as buying a call option.

Buying a Stock and a Put Option, and Lending the Present