Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is ________. A) S₀ − Xe^−rt B) S₀ − X C) S₀+ Xe^−rt D) S₀+ X

Question

Quizplus · Accepted Answer

If prices are at equilibrium, the call and put options will essentially cancel each other out, resulting in a synthetic long position in the underlying stock. The value of a synthetic long position can be calculated as S0 - Xe^-rt, where S0 is the current stock price, X is the exercise price, r is the risk-free interest rate, and t is the time until expiration. Therefore, the value of this portfolio would be A) S0 - Xe^-rt.

Suppose You Purchase a Call and Write a Put on the Same