put-call parity states: C - P = S - K·e^(-rT)

C - P = S - K·e^(-rT)

While not exact due to transaction and financing costs, the put-call parity is a close approximation in liquid markets.

Example

If a call option (C) costs 5 and a put option (P) costs 3, with a strike price (K) of 100 and time to expiry (T) of 1 year, the forward price (S) would be 100·e^(-rT) = 100·e^(-0.05) ≈ 95.12.

Remember this

Understanding put-call parity helps investors price options and hedge positions accurately.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

the Black-Scholes formula prices

Black–Scholes equation governs derivative prices

Write the Black-Scholes formula for a European call option: C = S·N(d₁) - K·e^(-rT)·N(d₂)

C = S·N(d₁) - K·e^(-rT)·N(d₂)

Greeks (finance)

Greeks measure sensitivity of option prices to underlying parameters

Risk parity

Risk parity allocates based on risk contribution, not capital allocation

d₁ and d₂ are in Black-Scholes: d₁ = [ln(S/K) + (r + σ²/2)T] / (σ√T), d₂ = d₁ - σ√T

d₁ = [ln(S/K) + (r + σ²/2)T] / (σ√T), d₂ = d₁ - σ√T

Quantity theory of money

MV = PY equation

Educational content, not financial advice.

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