A software using the precept of put-call parity determines the theoretically appropriate relationship between the costs of European put and name choices with the identical underlying asset, strike worth, and expiration date. This relationship includes the present worth of the underlying asset, the strike worth, the risk-free rate of interest, and the time to expiration. For example, if the market worth of a name choice is larger than what put-call parity dictates, a dealer might theoretically revenue by promoting the overpriced name and concurrently shopping for the corresponding put and underlying asset.
This precept supplies a important framework for choices pricing and arbitrage identification. Deviations from parity recommend market inefficiencies, presenting potential buying and selling alternatives. Its historic improvement stems from the foundational work in monetary economics on arbitrage pricing idea. Understanding and using this precept permits for a extra subtle method to choices buying and selling and threat administration.
