• Put-Call-Parity

    Put call parity is used to establish the relationships between Put and Call options to prevent the arbitrage opportunity. If there is any mismatch the arbitrage opportunity is present.

    The Put-Call Parity is

    c + X / (1 + RFR) T = S + p

    Where c = Call premium

    p = Put premium

    X = Exercise Price

    S = Spot price

    RFR = Risk Free Rate

    T = Time duration until the exercise date.

    Based on the put-call parity we can determine whether the market call premium is correct or not from the call premium calculation based on the spot rate and put premium. This is also true for Put premium as well. If there is any difference, then there will be arbitrage opportunity which will push the price to the correct value.

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