Hey guys! I have a little confusion regarding the put-call-forward parity. In the CFAI curriculum, it says that one can create a synthetic protective put by going long a forward contract and long a risk-free bond (which will be equal to going long the asset). But in the formula, we only have a derivative (the forward contract) and the put, but where is the risk-free bond? They only say that the formula is going long a forward (derivative) and long a put.
If someone could clarify this, I would be much appreciated.
But in the side of the call, the X is the risk-free bond, but on the side of the put, there is only the derivative. Shouldn’t be another risk-free bond? (because it is going long with a forward and long a risk-free bond in order to have S0
The left side – long a call option and short a put option – is the same as buying the underlying (stock) today at a price that is the present value of the strike.
The right side is the present value of the futures price of the underlying (stock) – which is the spot price of the underlying (stock) – less the present value of the strike price; it’s the same as owning the underlying (stock) today at a price that is the present value of the strike.
In case someone lands here having the same doubt. How I understood this! So instead of buying an asset, we buy a forward and a risk-free bond with the long put. I am buying forward (‘0’ value at the inception, hence I don’t pay anything now, therefore it doesn’t reflect in the equation) to purchase the asset in the future, but I simultaneously will buy a risk-free bond having the same face value as my forward price contract to cover the asset purchase. So the risk-free bond (same as forward price) and a long put will create a synthetic protective put which is similar to fiduciary call…