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.

Question

Quizplus · Accepted Answer

Buying a put option on a bond provides downside protection to the investor, while being long in the bond provides potential upside profit. The combination of the two mimics the profit function of buying a call option, as it allows the investor to benefit from any increase in the bond's price while also limiting potential losses with the put option. Therefore, the best choice is buying a call option (D).

The Combination of Being Long in the Bond and Buying