Draw profit diagram for the combined position

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Reference no: EM132177195

Question - Suppose you short an index valued for $1000. To protect yourself from value increase you buy a 1000-strike 1-year call with a premium of $93.81. You are given r = 2% annual effective.

(a) Draw a time table for the shorted index, and the purchased call, and the combined position?

(b) Draw profit diagram for the combined position. What is the name of the combined position?

(c) Verify that you obtain the same payoff diagram and profit diagram by purchasing a 1000-strike put option with T = 1 year to expiration and premium $74.20, coupled with borrowing $980.39.

(d) Verify the result using put-call parity.

Reference no: EM132177195

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