Here is a problem in Hull's book and the given solution:
- My approach was to compute the profit $\pi = \pi_{SP} + \pi_{LC}$ (short put, long call).
One can show that $\pi = \pi_{SP} + \pi_{LC} = S_T - K + p_{SP} - p_{LC}$, where $p_{SP}, p_{LC}$ are the prices of the options.
So if we want $p_{SP} = p_{LC}$, then we must have $\pi = S_T - K$
Is that right?
- I'm not quite sure I understand the last two sentences of the answer in the solutions manual. What is the difference between forward price and delivery price? What I think the answer means:
Because the payoff from LC and SP (long call and short put) is $S_T - K$, because the payoff from a fwd contract is $S_T - F$ and because a fwd contract is LC and SP combined, $p_{SP} = p_{LC}$ when $K = F$?
Am I understanding right? How exactly does the conclusion follow if so? If not, what exactly does the solutions manual mean to say?