Explanation:
A fiduciary call is a portfolio strategy that combines a long position in a zero-coupon bond (with face value equal to the strike price) and a long position in a call option on the underlying stock with the same strike price. The zero-coupon bond will mature to exactly the strike price at expiration, ensuring that the investor has the funds to exercise the call if it is in-the-money. This strategy replicates the payoff of a European call option on a non-dividend-paying stock, providing a risk-free hedge for the obligation to pay the strike price at expiration. Therefore, Smith's strategy of holding a zero-coupon bond with face value $100 along with a long call option with a strike price of $100 represents a fiduciary call.
Q.754 Johanna Smith is a treasury manager at Easy Bank. She manages the treasury affairs and also the investment advisory activities of the bank. She invests in treasury and money market instruments to manage short-term cash, but for long-term cash management, she uses other instruments. Currently, she has invested in zero-coupon bonds with the face value of $100, and at the same time, she has also taken a long exposure in call options with the strike price of $100. Which of the following accurately depicts Smith's strategy?
A
Smith has constructed a put-call parity.
B
Smith has constructed a covered call.
C
Smith has constructed a fiduciary call.
D
Smith has constructed a protective put.
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