
350 Derivatives and Risk Management
Initial cash ow of this strategy
Buy a put and pay the put price = –P
Borrow the present value of the exercise price = S
X
× e
–rT
Buy the stock and pay the current stock price = –S
t
Initial investment = (S
X
× e
–rT
) – (P + S
t
)
e terminal value of this strategy can calculated as follows:
Terminal value = Terminal value of the bought put + Terminal value of the bought stock
– Repayment of the amount borrowed with interest
Terminal value of the bought put = Max [(S
X
– S
T
), 0]
Terminal value of the bought stock = S
T
Repayment of the amount borrowed with interest = S
X
× e
–rT
× e
rT
= S
X
Terminal value of the portfolio = ...