C + X/(1+R)^t = P + S if left hand side is higher than right hand side (protective put is cheaper)… to do arbitrage, we are long the right hand side, therefore we short the left hand side. so we are selling/short the call…what are we doing with the X (bond) are we borrowing funds or lending funds? i get confused…sorry
if left hand side is higher than right hand side (protective put is cheaper)… No - You will short PP and it is higher than RHS (Fiduciary call) to do arbitrage, we are long the right hand side, therefore we short the left hand side. (Yes we long the fiduciary call (Call + Bond) and short PP - Stock and Put) so we are selling/short the call…what are we doing with the X (bond) ( NO We are buying call and bond as they are undervalued) are we borrowing funds or lending funds? i get confused…sorry (Doesn’t go this concept of cash and carry with protective put I guess)
sorry about that. i got the CFAI text out. if X term is (+)ve in our transaction, we are buying bond aka lending if X term is (-) ve in our transaction, we are issuing bond, aka borrowing. page 162, examle 3 CFAI text.
in that context yes. I assumed that you are talking about cash and carry. Yes if right side is undervalued- you will buy the bond hence lend money to issuer for coupon and if it is overvalued you will sell the bond hence issue the bonds and borrow the money in return of coupon.