What
is the meaning of Put-Call Parity?
This
is a principle-based on the relationships of the European price on options and
the call options of the same class. This is done with the same asset, strike
price amount and expiration date. As per Put-call Parity, the holding of European put that is short and
the long European call of the same class delivers the same return. It is done
as by holding one forward contract ( means a customized contract between to
parties to buy or sell some asset) on the same underlying asset and it also has
the same expiration and the forward price (is a predicted delivery price of any
commodity, currency or even a financial asset) is equal to the striking e
price. In case the prices that are input
and call options deviate for this relationship to not hold then an arbitrage
(is purchase and sale of an asset to make a profit from a difference in assets
price from the market) opportunities exist. This means that the worldly traders
can earn risk-free profits and in such good opportunities are short-lived in
liquid markets.
The
equation of put-call parity – c+PV(x) = P +S
Here
C means the price of the European call option and PV(x) means the present value
of strike price that is x, discounted from the value of the expiration date
from the risk-free rate, P means the price of European Put and S means Spot
Price or you can say that the current market value of the underlying asset.
The
put-call parity - understanding it
Where
does the put-call parity apply? It applies to the only European options. This
can only be used on the expiration date. It is not as the American options
which can be used before.
Points
to remember
Put
or call parity only shows the relationship between the European put and call.
These both have the same underlying asset and same expiration and even the same
strike price.
It
is said that the price of the call option can implement a specific price for
the corresponding put option also which has the same strike price and
expiration and vise verse is the same
And
when the diversion of put and call happens the opportunity to arbitrage is
emerged. This enables many traders to earn a good profit because of risk-free
profit.
How
does put call parity work
Compare the protective put and fiduciary call’s
performance of the same class, this is another way to imagine Put-Call Parity.
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