Put-call parity
In financial mathematics, put–call parity defines a relationship between the price of a European call option and European put option, both with the identical strike price and expiry, namely that a portfolio of a long call option and a short put option is equivalent to (and hence has the same value as) a single forward contract at this strike price and expiry. This is because if the price at expiry is above the strike price, the call will be exercised, while if it is below, the put will be exercised, and thus in either case one unit of the asset will be purchased for the strike price, exactly as in a forward contract.
[math]S + P = C + \dfrac {K} {1+RFR^t}[/math]
Mnemonic[edit]
1.[edit]
In a party, SiP a CoKe, add one Raspberry Flavored Rum topped it with a shot of tequila
party | Put-call parity |
SiP a CoKe | Stock price |
Put option | |
Call option | |
StriKe price | |
(1+RFR)^{t} | 1+Raspberry Flavored Rum topped with a shot of tequila |
PV of Strike Price K = K/(1+RFR)^{t}
2.[edit]
party CoKe PepSi
party | Put-call parity |
CoKe PepSi | Call option |
StriKe price | |
Put option | |
Stock price |
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