Options -- BB1

Another_attempt · September 16, 2019, 3:33pm

I’m looking at reading 15 (2020 books) and BB1. The question asks to discuss how a short forward contract can be hedged using a synthetic long forward (part 2 of question 1).

They mention buying a put and selling a call but make no mention of borrowing funds (using put-call forward parity). Am I missing something?

Thanks.

S2000magician · September 16, 2019, 5:15pm

If everything’s fairly priced, then the price of the put should equal the price of the call. Note that the strike will be today’s price increases by the risk-free rate for the time until expiration.