“Put call parity” says that the price of a European put (or call) option can be deduced from the price of a European call (or put) option on the same currency, with the same strike price and expiration.
When the strike price is the same as the forward rate (an “at-the-money” forward), the put and the call will be equal in value.When the strike price is not the same as the forward price, the difference between the value of the put and the value of the call will equal the difference in the present values of the two currencies.
Arbitrage assures this result. If the “put call parity” relationship did not hold, it would pay to create synthetic puts or calls and gain an arbitrage profit. If, for example, an “at-the-money forward” call option were priced in the market at more than (rather than equal to) an “at-the-money forward” put option for a particular currency,a synthetic call option could be created at a cheaper price (by buying a put at the lower price and buying a forward at the market price).
Other synthetics can be produced by other combination (e.g.,buying a call and selling a forward to produce a synthetic put; buying a call and selling a put to create a synthetic long forward; or selling a call and buying a put to create a synthetic short forward).
The “put call parity” is very useful to options traders. If, for example, puts for a particular currency are being traded,but there are no market quotes for the corresponding call, traders can
deduce an approximate market price for the corresponding call.
No comments:
Post a Comment