Option Pricing: Put-Call Forward Parity
An investor has sold a security short and has also purchased a call option contract as insurance in case the short security position goes in the wrong direction. The payoff diagram for this investor _most closely_ resembles that of a:
Correct!
The short asset and long call payoffs are as shown:
The long call serves as a form of insurance for the short position, limiting exposure to the investor in case the underlying asset price rises. This combination shown has the same shape as that of a long put option.
Incorrect.
Consider that an investor holding a short put would not want the price of the underlying to decrease, but the investor with the short asset position would want this.
Incorrect.
Think about the investor's exposure to a decline in the underlying asset price. With a short call position, the investor wouldn't care, but with a short asset position, the investor certainly would. These two positions cannot be similar.
long put.
short put.
short call.
