According to put-call-forward parity, if the put in a protective put with forward contract expires out of the money, the payoff is most likely equal to:
the face value of a risk-free bond. the market value of the underlying asset. zero.
Correct answer is B. I know put-call-forward parity equation is c + PV(x) = p + s.
But I still don’t know how to get the right answer. Can anyone help me on that ?
If the put expires out of the money, then all you have of value is the underlying asset.
To elaborate a bit more on S2000’s answer:
Remember that a protective put (right hand side of your put-call parity : p+s ) consists of buying:
1) Underlying asset (Stock, TV, Car, Laptop etc.)
2) Put Option
They payoff is always the sum of those two items. An example:
1) Say the Asset is worth $100
2) Say the Put is worth $10
Then your payoff is: $100+$10=$110
And in the case above, we we are told that the put is out of the money, so it is worth nothing, thus you have:
1) Say the Asset is worth $100 again
2) the Put is worth zero
Then your payoff is: $100+$0=$100
@biockout2003: Notice that you are referring to the formula for the put-call parity , the question is talking about the put-call forward parity which is slighty different but does not make much of a difference in this context since the payoffs are identical (but just as a reminder in case they ask for the formula).