The payoff diagram of portfolio insurance (owning a stock and a put) has the same shape as the payoff diagram for ?. The answer if “buying a call option.” Why? Thank you very much.
If you draw out the Portfolio Insurance (which is the same as the Protective Put) and lay the Owning Stock and Buying Put on top of each other --> you end up with a payoff of ----/ which is the same as that of Buying a Naked call. CP
Put-call parity is really important for understanding derivatives at all levels of CFA exam. You should check this out more.
Just a small sidetrack… I got suddenly confused. Fiduciary call and covered call are the same rite?
No - a covered call is when you sell a call but own the underlier. There is limited risk in the stock rising in this position (unlike in selling an uncovered call). A fiduciary call is a bs name for buying a call option “instead of” buying the stock and a protective put.
I thought a fiduciary call was C + X/(1+RFR)^T which is being long a call and owning a treasury bond?
A fiduciary call and protective put are equivalent in terms of payoffs. Each provides the market price on the upside with the exercise price of the option as a floor. In a protective put, you own the stock and a put. If the stock price rises, great. If it falls, you exercise the put and sell. You get the upside of the stock price rising and eliminate the risk of the stock falling below the exercise price. In a fiduciary call, you own a call option and a riskless bond maturing at the call option’s strike price. If the stock is worth more than the exercise price, you exercise the call and get the upside. If it’s worth less, you get the exercise price from the bond and your call option is worthless. Again, you get the upside of the stock and eliminate the downside below the exercise price. I think this is the basis of put-call parity.
CX = Cathay PS = Playstation… at least that’s how I remember it… maybe other ppl hv better mneumonics… another one for PS comes right out of my head…
C’mon - how many times have I heard “fiduciary call” and gone looking for that riskless bond?