Can Put-Call Parity Be Applied to American-Style Options?
The standard put-call parity formula cannot be applied directly to American-style options because of the possibility of early exercise. However, boundary conditions and inequalities based on the parity relationship can be established.
These inequalities provide a range within which the prices of American calls and puts must trade to prevent arbitrage, though they do not provide a single, exact pricing relationship like the European parity formula.
Glossar
Parity Relationship
Principle ⎊ Parity relationship refers to a fundamental theoretical equivalence between the price of an asset and the combined prices of related financial instruments.
Parity
Equivalence ⎊ ⎊ Parity, within financial markets, fundamentally represents a state of equality between two or more assets, rates, or pricing models, often serving as a benchmark for arbitrage opportunities or risk-neutral valuation.
Parity Formula
Calculation ⎊ The Parity Formula establishes the theoretical relationship between the price of an asset, its corresponding derivative, and other relevant market variables, ensuring no riskless profit exists in the absence of transaction costs.