Top Things to Know About the Putt-Call Parity Theorem

The putt-call parity theorem deals with an investing option pricing concept that requires the foreign values of call and putt options to be equal. This prevents computer-assisted trading. This article will cover the top things to know about the putt-call parity theorem.

Top Things To Know About The Putt-Call Parity Theorem

• The formula for the putt-call parity theorem can be expressed as follows:
  Putt Option + Stock = Call Option + Bond




• The theorem requires, mathematically, that option trading with similar payoffs or risk must equal the same profit or loss upon expiration so not computer-assisted trading exists.




• It provides a way for borrowing indirectly through the option market so that it is risk-free.




• The theorem involves four financial instruments. The instruments are put option, an underlying asset, and cash. A call option gives the owner the right to buy a certain amount of the underlying asset. A put option provides the right to sell a certain amount of the underlying asset. The underlying asset can refer to stock or assets such as oil or gold. The cash is the present value of the investment option price.




• The investment options must be European investment options.




• The theorem assumes that interest rates are constant.