Consider a stock that pays no dividends.You hold a portfolio comprising an asset-or-nothing call and a cash-or-nothing put.The options share the same strike,and the cash-or-nothing put pays an amount equal to the strike price if the put finishes in-the-money.Your portfolio is equivalent to
A)A vanilla call.
B)A vanilla put.
C)A covered call.
D)A protective put.

Question

Quizplus · Accepted Answer

The portfolio described is equivalent to a protective put. An asset-or-nothing call pays off the value of the stock if it is above the strike price at expiration, essentially acting like a call option but paying the stock value instead of the difference between stock price and strike price. A cash-or-nothing put pays a fixed cash amount (equal to the strike price in this case) if the stock is below the strike price at expiration, providing a fixed downside protection similar to a put option's payoff. Together, these two options replicate the payoff of owning the stock (from the asset-or-nothing call) with downside protection (from the cash-or-nothing put), which is exactly how a protective put strategy works.

Consider a Stock That Pays No Dividends