Hi All, I was just looking at the solution to this question (it is the exam style ques at the end of Chapter 10). I know that we have to sell a put and buy a call as part of the strategy. At the end of the solution, it says that the accumulated value of the share and put is K + d.e^r(T-t) if St < K. Since we have sold the put, we are forced to buy stock from the holder of the put if K > St. Then how is it that when K > St, we have K as the value of our portfolio? This seems to me like we are looking at the put and share position as if we are holders and not sellers. Thanks much.
Traditionally, put call parity is shown by showing that the two portfolios are the same. Buying a call and holding cash Buying a put and holding a Share and this is the way shown in the examiners report. That is not to say that it cannot be done another way C + D +Ke^-rt = P +S can be rewritten as say C - P = .... where the left side means buy a call and sell a put.
