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## put-call parity and formulas for option payoffs

Posted 12-29-2008 at 01:03 AM by Marid Audran
Updated 01-15-2009 at 02:22 PM by Marid Audran (changing to a more commonly used notation)

Basic material here. I was reading McDonald's textbook and did not see things described in exactly this way.

Define the function
$x^+ = max(x,0)$.
Say K is the strike price of an option and X is the spot price of the underlying asset at expiration. Then here are the payoffs:
• Long call: $(X-K)^+$
• Short call: $-(X-K)^+$
• Long put: $(K-X)^+$
• Short put: $-(K-X)^+$
Put-call parity is related to the fact that
$(X-K)^+ - (K - X)^+ = X - K.$
That's the payoff from a long call plus a...
Posted in Exams, MFE-3F

## Put-call parity: assorted observations

Posted 12-29-2008 at 12:44 AM by Marid Audran
Updated 12-29-2008 at 01:11 AM by Marid Audran (adding category)

Hi there---first time blog poster. I hope I get this right. FYI, I'm studying at present for Exam MFE/3F. My purpose is to think out loud about some of the facts and concepts covered in the exam. When studying, I'll occasionally set aside some notes to post in the blog later on.
• One way of writing put-call parity is

C - P = PV(F - K),

where C is call price, P is put price (and put and call have identical time to expiration and strike price K), and F is the
...
Posted in Exams, MFE-3F