23-74 The combination of being long in the bond and buying a put option on a bond mimics the profit function of

Question

Quizplus · Accepted Answer

Buying a put option on a bond gives the holder the right to sell the bond at a specified price (strike price) before the expiration date, which provides downside protection. Being long in the bond means owning the bond, which benefits from an increase in bond price. When the bond price increases, the profit from being long in the bond will offset the premium paid for the put option. Therefore, the combination mimics the profit function of buying a call option, which benefits from an increase in the price of the underlying asset (bond).

23-74 the Combination of Being Long in the Bond and Buying