Now suppose that there is a call option worth C5 and a put o

Now suppose that there is a call option worth C=$5 and a put option worth P=$3, both of which have strike prices of $100. Show how the options can be used to replicate the short position on the underlying asset.

Solution

Since both of them have a strike price of 100$

Change in call option - Change in put Option = $5 - $3 = $2

New Stock Price = Strike Price + (Change in call option - Change in put option)

=> 100 + 2

=> $102

Hence it can be used to replicate the short position because the price obtained will be increased for the underlying asset