Explanation:
Feature I is correct. A range forward contract is created with a combination of a long call and a short put or a short call and a long put.
Feature II is correct. In a long-range contract, the call strike price is greater than the put strike price.
Feature III is correct. The strike prices are set in a way that the value of the call is usually equal to the value of the put. This is because in put-call parity, when the call and put have the same maturity, same underlying, and the cost of the combined position nets to zero, the strike prices must be set such that the call value equals the put value. This creates the "range" characteristic of the range forward contract where the investor locks in a price range for the underlying asset.
Q.786 Ryan Holland is an options trader that uses standard European calls, standard European puts, forward contracts, cash, and the underlying asset to create exotic options known as packages. He believes that range forward contracts have the following features. Determine which of these features are correct.
I. A range forward contract is created with a long call and a short put or a short call and a long put
II. In the case of the long call and the short put, the call strike price is greater than the put strike price
III. The combination of costs from the two positions typically nets to zero
A
Features I and II are correct.
B
Features II and III are correct.
C
Features I and III are correct.
D
Features I, II, and III are correct.
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