The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?
A) Buy the call, sell the put; lend the present value of $40.
B) Sell the call, buy the put; lend the present value of $40.
C) Buy the call, sell the put; borrow the present value of $40.
D) Sell the call, buy the put; borrow the present value of $40.

Question

Quizplus · Accepted Answer

By buying the call and selling the put, you create a synthetic long stock position. Lending the present value of $40 ensures that you have the same payoff as holding the stock at expiration.

The Common Stock of the Avalon Corporation Has Been Trading