I Miss L1

Put call parity Posted by: daj224 (IP Logged) [hide posts from this user] Date: May 22, 2008 02:52PM DESCRIBE IT AND HOW YOU WOULD ARBITRAGE OFF IT. 90 SECONDS

Put-Call Parity = C + X/(1+r)^t = P + S In other Words, a Call option and a Risk-free bond EQUAL holding the underlying stock plus a put option You can arbitrage off it if the Put, Call, or Stock are under/over valued by creating a synthetic verison via the above.

good job… now you can proceed directly to L2