You are choosing between buying a certain security forward or using the option market for a similar effect (that is, t
Posted: Fri Jul 01, 2022 7:47 am
You are choosing between buying a certain security forward orusing the option market for a similar effect (that is,to have the same payoff pattern). Suppose that at an exerciseprice equal to the current FORWARD (note: this is a wordingchange)price of that security, the premium of a put onthat stock is $2 per contract; the premium on the call is $2 percontract. Assume there are negligible transactionscosts. Which appears to be the better strategy, using theoptions market or the forward market? Explain.