# Fixed Income Question

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 ?

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If the put expires out of the money, then all you have of value is the underlying asset.

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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).