Actuarial Outpost put-call parity
 Register Blogs Wiki FAQ Calendar Search Today's Posts Mark Forums Read
 FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Meet Caitlin Cunningham, Entry Level Senior Recruiter

#1
04-13-2007, 09:24 AM
 sheridan Member Join Date: Sep 2006 Posts: 330
put-call parity

What does the put-call parity tell me? I'm studying from Broverman's study manual.
#2
04-13-2007, 09:29 AM
 Gandalf Site Supporter Site Supporter SOA Join Date: Nov 2001 Location: Middle Earth Posts: 26,455

It gives you a relationship between the price of a call and the price of a put, assuming both are for the same strike price on the same date.
#3
04-13-2007, 09:43 AM
 Bama Gambler James Washer / Notes Contributor SOA Join Date: Jan 2002 Location: B'ham, AL Posts: 16,136

A synthetic forward can be created by buying a call at strike K and selling a put at strike K. The cost of this forward is Call(K,T) - Put(K,T). A true forward has a premium of 0. So if Call(K,T) - Put(K,T) > 0, then your right to buy at price K must be smaller than the forward price (call it F), otherwise you would just enter into a forward (which has no upfront cost) instead of buying a call and selling a put. Put-call parity says the present value of this discount must be equal to the cost of the synthetic forward:
PV(discount) = cost to create synthetic forward
PV(F-K) = Call(K,T) - Put(K,T)
__________________

Now offering online seminars and live seminars for the Spring 2013 exams.

#4
04-14-2007, 01:09 AM
 krzysio Member SOA AAA Join Date: Mar 2005 Location: Bloomington, Illinois Favorite beer: Tyskie Posts: 1,267

Quote:
 Originally Posted by Bama Gambler A synthetic forward can be created by buying a call at strike K and selling a put at strike K. The cost of this forward is Call(K,T) - Put(K,T). A true forward has a premium of 0. So if Call(K,T) - Put(K,T) > 0, then your right to buy at price K must be smaller than the forward price (call it F), otherwise you would just enter into a forward (which has no upfront cost) instead of buying a call and selling a put. Put-call parity says the present value of this discount must be equal to the cost of the synthetic forward: PV(discount) = cost to create synthetic forward PV(F-K) = Call(K,T) - Put(K,T)
And since price is a linear operator and PV(F) is the spot price, you can also say it as
S - PV(K) = Call - Put
which for me is the easiest way to remember. It also can be stated nicely this way:
Call = S - PV(K) + Put
which shows that paying employees in options amounts to massive exploitation of Capitalists by employees, especially executives.

Yours,
Krzys'
__________________
Want to know how to pass actuarial exams? Go to:
http://smartURL.it/pass

 Thread Tools Display Modes Linear Mode

 Posting Rules You may not post new threads You may not post replies You may not post attachments You may not edit your posts BB code is On Smilies are On [IMG] code is On HTML code is Off

All times are GMT -4. The time now is 06:35 AM.

 -- Default Style - Fluid Width ---- Default Style - Fixed Width ---- Old Default Style ---- Easy on the eyes ---- Smooth Darkness ---- Chestnut ---- Apple-ish Style ---- If Apples were blue ---- If Apples were green ---- If Apples were purple ---- Halloween 2007 ---- B&W ---- Halloween ---- AO Christmas Theme ---- Turkey Day Theme ---- AO 2007 beta ---- 4th Of July Contact Us - Actuarial Outpost - Archive - Privacy Statement - Top