Put Call Forward Parity

CFA Level II Portfolio Management
#1

In Example 10 of Reading 49 reagarding put call Forward Parity, the synthetic put is 4.88 and actual put is 3. So I understand completely that we buy the put and sell the synthetic put.

The synthetic put is given by p = c + (X-F(0,T))/(1+r)^T

Synthetic put could be read as buying call option, buying the bond and selling the forward?

Here we are selling the synthetic put, in that case it should be equivalent ( based on right hand side of teh equation) to selling the call ( which am fine) but I cannot understand why we should buy the bond, we should short bond, no?

Please let me know

Thanks!

#2

A long put is equivalent to a long call plus a long bond plus a short forward.

A short put is equivalent to a short call plus a short bond plus a long forward.

#3

Thanks S2000, exactly my point but in the solution

it says the following:

Buy put : -3

Sell synthetic put:

Sell Call : +15.25

Buy bond : -10.37 ? This is what am not able to understand. We should short the bond too, correct?

#4

Bump**

S2000Magician, you are spot on, but as mentioned above…why does it mention in the solution we are Selling the Call and Buying the Bond?

Short Put = Short Bond (among other things)

#5

Bump**

S2000Magician, you are spot on, but as mentioned above…why does it mention in the solution we are Selling the Call and Buying the Bond?

Short Put = Short Bond (among other things)