Buying a stock and a put option, and depositing the present value of the exercise price in a bank account and buying a call provide the same payoff.

Question

Quizplus · Accepted Answer

This strategy is known as a protective put, where an investor buys a stock and a put option to protect against a potential decline in the stock's value. By depositing the present value of the exercise price in a bank account and buying a call, the investor is essentially replicating the same payoff as the protective put, thus making the statement true.

Buying a Stock and a Put Option, and Depositing the Present