Synthetic Long Put
The synthetic long put position consists of three elements: shorting one stock, holding one European call option and holding dollars in your bank account.
(Here is the strike price of the option, and is the continuously compounded interest rate, is the time to expiration and is the spot price of the stock at option expiration.)
At expiry you have to repay the stock, which gives a cashflow . The bank account will give a cashflow of dollars. Moreover, the European call gives a cashflow of . The total cashflow is . We see that the total cashflow at expiry is exactly the cashflow of a European put option.
Read more about this topic: Synthetic Position
Famous quotes containing the words synthetic, long and/or put:
“In every philosophical school, three thinkers succeed one another in the following way: the first produces out of himself the sap and seed, the second draws it out into threads and spins a synthetic web, and the third waits in this web for the sacrificial victims that are caught in it—and tries to live off philosophy.”
—Friedrich Nietzsche (1844–1900)
“You want to prepare your child to think as he gets older. You want him to be critical in his judgments. Teaching a child, by your example, that there’s never any room for negotiating or making choices in life may suggest that you expect blind obedience—but it won’t help him in the long run to be discriminating in choices and thinking.”
—Lawrence Balter (20th century)
“What have Massachusetts and the North sent a few sane representatives to Congress for, of late years?... All their speeches put together and boiled down ... do not match for manly directness and force, and for simple truth, the few casual remarks of crazy John Brown on the floor of the Harper’s Ferry engine-house,—that man whom you are about to hang, to send to the other world, though not to represent you there.”
—Henry David Thoreau (1817–1862)