30 years: Financial markets trader
In this video Abdulla outlines the concept of Put-Call Parity and how to formulate it into an expression and get all six combinations (long and short positions). He describes the arbitrage-free relationship between call and put premiums for European options. Perhaps most importantly, Abdulla explains how to take advantage of risk-free profit that arises from arbitrage opportunities
In this video Abdulla outlines the concept of Put-Call Parity and how to formulate it into an expression and get all six combinations (long and short positions). He describes the arbitrage-free relationship between call and put premiums for European options. Perhaps most importantly, Abdulla explains how to take advantage of risk-free profit that arises from arbitrage opportunities
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6 mins 1 sec
Put–Call parity is an important concept in the option world. The original Black Scholes model priced a European call option on a non-dividend-paying stock. The price of the equivalent put option was derived using the concept of Put-Call Parity.
Key learning objectives:
Describe the put-call parity
Understand how to calculate the fiduciary call
Identify one of the keys to understanding the put-call parity
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The put-call parity defines the arbitrage-free relationship that determines the connection between the call premium and the equivalent put premium, under the following conditions:
Given a call premium the put premium must be at a level consistent with Put-Call Parity so that the actual futures price and the synthetic futures price are identical, excluding transaction costs.
Fiduciary call - Protective put. This relationship can also be expressed as;
call premium plus present value of the strike equals put premium plus stock.
This content is also available as part of a premium, accredited video course. Sign up for a 14-day trial to watch for free.
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