Wize University Introduction to Finance Textbook > Options
Put-Call Parity
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Put-Call Parity
Put-call parity refers to the relationship between a European call option and a European put option with the same characteristics.
- Defines the relationship between the value of a call and a put with the same underlying asset, strike price, and expiration date.
- Only applies to European options
Where:
P = the value of the put option
C = the value of the call option
S = the current value of the underlying stock
PV(X) = the present value of the strike price discounted at the risk-free rate
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Example: Put-Call Parity
Shares of ABC Inc are selling for $30, and a one-year European call option with a strike price of $40 is selling for $0.60. The risk-free rate is 7%, find the value of a one-year European put option with the same strike price.
Practice: Put-Call Parity
Shares of XYZ Corporation are trading for $75 and a six-month European put option on those shares with a strike price of $60 is selling for $1.20. If the risk-free rate is 6%, find the value of a six-month European call option with the same strike price.
Round your final answer to 2 decimal places
| Value of the call option | $ |