Derivatives and Risk Management

14

Put–Call Parity

LEARNING OBJECTIVES

After completing this chapter, you will be able to answer the following questions:

• What is put–call parity?

• What are the implications of put–call parity?

• How can one create a synthetic call option, synthetic put option, synthetic position in the underlying security, synthetic investment in a risk-free security?

• What is the put–call parity for a dividend-paying European option?

• What is the put–call parity for an American option?

• How can the principle of put–call parity be used for regulatory arbitrage?

BOX 14.1 Put–Call Parity and Regulatory Arbitrage

Many of the financial innovation techniques are based on exploiting inconsistencies in the regulatory environment, called regulatory arbitrage as ...