Explain the ‘Put-Call Parity’ Theorem.
Put-Call Parity is a principle in financial engineering that defines the relationship between the price of a European Call option and a European Put option with the same strike price and expiration date, written on the same underlying asset. It states that the value of a portfolio consisting of a Call and cash should equal the value of a portfolio consisting of a Put and the underlying asset.
Glossar
Financial Engineering
Architecture ⎊ The application of financial engineering within cryptocurrency, options trading, and derivatives necessitates a modular architecture, prioritizing adaptability to rapidly evolving market dynamics.
Put-Call Parity
Relationship ⎊ Put-call parity describes a fundamental relationship between the price of a European call option, a European put option, and the underlying asset price, assuming they share the same strike price and expiration date.
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.
Strike Price
Reference ⎊ The Strike Price is the predetermined reference level set at the contract's inception against which the underlying crypto asset's spot price is compared at expiration or exercise.