Derivatives and Risk Management, 2nd Edition by Pearson

12

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?

In Chapter 11, we saw that the profit diagram for a written put looks very similar to the profit diagram for covered call writing, where an investor writes a call while owning the underlying security at ...