23-19 Simultaneously buying a bond and a put option on a bond produces the same payoff as buying a call option on a bond.

Question

Quizplus · Accepted Answer

This statement is true according to the put-call parity principle. When buying a bond and a put option on a bond, the investor has the right to sell the bond at the strike price if the bond price decreases. This offsets potential losses on the bond. Buying a call option on a bond gives the investor the right to buy the bond at the strike price if the bond price increases, which also offsets potential losses. Therefore, the payoffs from both strategies are equivalent.

23-19 Simultaneously Buying a Bond and a Put Option on a Bond