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  Put-Call Parity

Put-call parity holds that portfolio with identical payoffs must sell for the same price to prevent arbitrage, the put-call parity relationship.
 

c + X/(1+RFR)T = S+p
 

If the asset has an underlying stream of cash flows, the put-call parity can change to:

c0+(X/(1+r)T) = p0 + [S0PV(CF,0,T)]

  • Buyer of a call option - long position in Call
  • Writer of a call option - short position in Call
  • Buyer of a put option - long position in Put

 

Writer of a put option - short position in Put

Intrinsic value of a call option = Max [O, S - X]

Intrinsic value of a put option = Max [O, X - S]

 
 

Example

The stock of a company is trading at $108.
1 year European call options with a strike price of $100 has a premium of $5 Interest rate is 8%. Find the premium of a 1 year European put option with a strike of $100.

Solution

$5

 





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