The Put/Call Parity
Definition
The put/call parity is the theoretical relationship between the value of a put option and the value of a call option at the same strike price.
How is it used?
There must be a relationship between the premium cost of a call option and the premium cost of a put option at the same strike rate, because otherwise there would be an arbitrage opportunity between the two – it would be possible to buy one, sell the other and lock in a profit. This can be seen as follows.
Suppose that I buy a European call option and sell a European put option on the same instrument, at the same strike, for the same expiry date. At the same time, I also sell the instrument for forward delivery on the same date.
At expiry, if the instrument’s ...
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