question pictureIn this question I have used put-call parity twice to get the discounting factor for time period 0 to t (which I feel is of no use for this question). Also I found the initial payoff and final payoff. However the solution tells to make use of the discounting factor to get the present value of the cost, which I am unable to comprehend. If we need to make use of discounting, why don't we use the same while drawing the strategies/ spreads (there we use the cost at t=0 and not the FV of the cost at time of expiry)]

  • $\begingroup$ Not sure I follow. You mean drawing hockey sticks? The premium you pay today is always discounted (see black scholars formula). $\endgroup$ – AKdemy Jun 10 at 19:51