Derivatives - Derivatives Section 2

Avatto>>CFA Level 1>>PRACTICE QUESTIONS>>Derivatives>>Derivatives Section 2

56. Analyst 1: The combination of a long asset, long put, and short the call will result in a risk-free position.
Analyst 2: The combination of a long call, long put, and the short asset will result in a risk-free position.
Which analyst’s statement is most likely correct?

  • Option : A
  • Explanation : Put-call parity is given by: long stock + long put = long call + risk-free zero coupon bond. Hence a risk-free zero coupon bond (a risk-free position) can be created as follows: long stock + long put + short call.
Cancel reply
Cancel reply

57. Which of the following transactions is the equivalent of a synthetic long put position?

  • Option : C
  • Explanation : Put-call parity is given by: long stock + long put = long call + long bond. Hence a synthetic put can be created as follows: long call + long bond – short stock.
Cancel reply
Cancel reply

59. In a binomial model, the volatility of the underlying is directly represented by the:

  • Option : B
  • Explanation : The up and down factors express how high and how low the underlying can go. Standard deviation does not appear directly in the binomial model, although it is implicit.
Cancel reply
Cancel reply