With notations found below (a) construct a synthetic put. (b) construct a synthe

Question

With notations found below

(a) construct a synthetic put. (b) construct a synthetic share.

Put-Call Parity for Options on Currencies Let S be the price of the foreign currency in dollars (i.e., $1.73 per British pound). Let rf be the foreign risk-free rate. Let rd be the domestic risk-free rate >- The cashflow from a long call: Today At Expiration long 1 call (K) ST - K 9/22 The cashflow from a synthetic call Today At Expiration ng l put long eT units of the foreign currency and invest at r -SeT borrow Ke-dT Total 0 Therefore, the Put-Call parity for currency options

Explanation / Answer

Synthetic Put:

Long 1 call

Short e^(-rf*t) units of ofreign currency by borrowing at rf

Lend Ke^(-rdt)

Synthetic Share:

Long e^(rf*t) call

SHort e^(rf*t) put

Lend Ke^((rf-rd)*t)

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