Friday, January 2

Put-Call Parity

· no arbitrage relationship for European-style put & call options that have same characteristics
· a port consisting of a call & a zero coupon bond (earning risk free return) with face value equal to strike = portfolio consisting of a put & a stock
· true only for European options
· the relationship must hold, otherwise arbitrage profit will be produced.

P0+S0=C0+Xe-rT

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