8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

It is important to note the distinction between the clearing house and the exchange itself. The clearing house does not get involved with physical delivery, nor does it provide any dispute settlement services. It only makes sure that cash is settled as and when due between the members. Therefore Choice 'c' is the correct answer

The put-call parity can be expressed as:

Call – Put = Spot – PV of exercise price

Note that a negative sign above means a short position. The 'term PV of exercise price' is the same as a bank deposit placed today equivalent to the PV of the exercise price so that we will have the cash flow on the exercise date to exercise the option.

Therefore only Choice 'd' is the correct answer as rearranging the above gives us Buying a call + Bank Deposit = Buying the stock + Buying a put.

Choice 'd' is therefore the correct answer.

Short calls and short puts have negative gamma, ie their delta increases at a decreasing rate as the price of the underlying change. Likewise, remember that long calls and long puts have positive gamma.