An Investor Can Create a Synthetic Call Option by

question 47

Multiple Choice

An investor can create a synthetic call option by

• A)taking a long position in a stock, simultaneously buying a put option on the stock, and investing the present value of the strike price in Treasury securities.
• B)taking a long position in a stock, and simultaneously buying a put option on the stock.
• C)short selling the stock and using the proceeds to buy a put option on the stock and investing the rest in Treasury securities.
• D)borrowing money at the risk-free rate and using the funds to invest in the stock itself.

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Definitions:

Deep Discount

The sale of an asset or product at a price significantly below its usual or intrinsic value.

Coupon Payments

Periodic interest payments made to bondholders, typically on a semi-annual basis, based on the coupon rate of the bond.

Municipal

Relating to a city or town or its governing body.

Sinking Fund

A reserve fund established by a company to set aside revenue over time for the purpose of paying off debt or replacing a major asset in the future.