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At time = 0, for a CALL option at exercise price (X) on a newly issued forward c

ID: 2806408 • Letter: A

Question

At time = 0, for a CALL option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in:

a put at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.

a risk-free pure-discount bond that pays FT – X at option expiration and short in a put at X.

a put at X and long in a pure-discount risk-free bond that pays FT – X at option expiration.

the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.

A.

a put at X and long in a pure-discount risk-free bond that pays X – FT at option expiration.

B.

a risk-free pure-discount bond that pays FT – X at option expiration and short in a put at X.

C.

a put at X and long in a pure-discount risk-free bond that pays FT – X at option expiration.

D.

the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.

Explanation / Answer

At time = 0, for a CALL option at exercise price (X) on a newly issued forward contact at FT (the forward price at time = 0), a portfolio with equal value could be constructed from being long in the underlying asset, long a put at X, and short in a pure-discount risk-free bond that pays X – FT at option expiration.

Option (D) is correct answer.