And how can C+, B+ and S- have the same position as P+. Can anyone explain this with an example?
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P+ S+ = C+, Bond +
This is given by put-call parity and so for P+ , it will be C+, Bond+ and S-, treat is as an equation , so when you take S+ on the right, it would be S-.
Think like this-
Payoff from P+= Max (X-ST, 0)
Payoff from S-= -ST (S- meaning sold the share so payoff will be neg bcz you will buy)
Payoff from C+= Max(ST-X,0)
Payoff from B+=X (Assuming the bond face value to be X)
So payoff from P+ = Max (X-ST,0)
Payoff from S-,B+,C+=Max( -ST+X+ST-X, -ST+X+0) i.e. Max(X-ST,0)
I hope I could clear your doubt.
Hey Shivani,
-St + X + St – X won’t this equation mean 0, so how come it can be P+ i.e X-St?