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gerico
Posts: 43
Joined: September 21st, 2002, 8:37 am

### What is put-call parity?

QuoteOriginally posted by: AVtGerico, i hope <a target=new class=ftalternatingbarlinklarge href="http://www.wilmott.com/310/attachments/ ... pean%2Ezip"> that </a> helpsOK, Now I understand your point, you say that the right to exercise early could be a strong arbitration way, giving the fact that there is a floor value for american PUTs ( they can be exercised early).One could buy the PUT for 39.16 (if the PC should be considered valid) and exercise it next day for a profit.There is a "floor" value for PUT and CALL american options.OK, so the PC parity don't hold for american options, and I'm definitively wrong. Thanks!

gerico
Posts: 43
Joined: September 21st, 2002, 8:37 am

### What is put-call parity?

QuoteOriginally posted by: gerico OK, so the PC parity don't hold for american options, and I'm definitively wrong. ;-)Anyway, from the graph it seems that the P-C parity stands when the american PUT is OTM (eg: the above arbitration cannot be performed). Am I right?

Paul
Topic Author
Posts: 10789
Joined: July 20th, 2001, 3:28 pm

### What is put-call parity?

I don't think anyone has said that Put-Call parity also means that calls and puts (Euro, of course, and with the same strike and expiration) must have the same implied volatilities. (And that takes care of dividends and interest rates at the same time.)When there is a bid-offer spread on the options then there must be an overlap between the bid-offer implieds on the call and the put...otherwise there is an arb opportunity.P

Paul
Topic Author
Posts: 10789
Joined: July 20th, 2001, 3:28 pm

### What is put-call parity?

So, we've got a definition, a proof, references to empirical tests, conditions and violations...I think we can put this one to bed!P

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