Quoto

Learn / Library / Expected value

Locking in a parity gap

Expected valueMedium

A stock with no dividend trades at . A European call with strike costs , the put with the same strike and expiry costs , and cash earns until expiry. You sell the call, buy the put, buy the stock and borrow the difference. What is your profit at expiry, per share, wherever the stock ends? Give an exact decimal.

Checking an answer needs JavaScript. The hint and the solution open without it.

A whole number, a decimal, a fraction like 3/8 or a percent.

Hint

The position is worth the strike at expiry whatever happens.

Solution
  1. You pay today, all of it borrowed, so you owe at expiry.
  2. The stock with the put and the short call is worth exactly at expiry.
  3. The profit is .

Answer:

Next questionBack to the library