What Is the Role of “Put-Call Parity” in Option Pricing?
Put-call parity is a fundamental principle that defines the relationship between the prices of a European call option, a European put option, and the underlying asset, all with the same strike price and expiration date. It states that a specific combination of these assets must trade at the same price to prevent arbitrage, providing a theoretical benchmark for option pricing.
Glossar
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.