Zero Coupon Bond

[trock913]

Can a zero coupon bond shift profit diagrams???

I've seen conflicting answers to this: in one manual, zero coupon bonds are used to match other profit diagrams by shifting the existing one of an option up or down. in another, this is marked as a false statement.

Quick responses greatly appreciated- exam tomorrow! Thanks!

[LifeIsAPoissonProcess]

No, a zero-coupon bond makes zero profit. This is why the identity Stock = Long Forward + Zero-Coupon Bond, is true. If the zero-coupon bond made profit, there would be arbitrage opportunity.

[mat157]

Zero coupon bond matches payoff diagrams, not profit diagrams.

[trock913]

Originally Posted by mat157

Zero coupon bond matches payoff diagrams, not profit diagrams.

when you say "matches", do you mean shifts? that may explain the discrepenancy in my mind...

Thanks!