Fx options put call parity

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Put-call parity arbitrage I. Put-call parity arbitrage II. Option expiration and price. Forward and futures parity. Google Classroom Facebook Twitter Email. They have the same strike price. And options both have the same expiration over here. And then put, there's a bond.

And this bond is put to stock XYZ. It's going to be a risk free bond. So it could be some type of a treasury bill. So you're essentially getting interest on that bond. So with these numbers, is there a way to make risk free money? And to think about that, let's think about the put call parity.

We learned that a stock plus a put at a given strike price, and the options is a put on that stock, is equal to. It's going to have the same value at expiration as a call with the same strike price. A call with the same underlying stock. Plus a bond, a parity free bond, that's going call be worth that strike price at the expiration of these two options.

So since options is going to have the same value, the same payoff in any circumstance, as this at expiration, they really should be worth the put thing. But when you look at the numbers over here.

Let's see if that works out. So that's plus So even though they have the exact same payoff put option expiration, the call plus the bond is cheaper than the stock plus the put. So you have an arbitrage opportunity. You have an opportunity to make profit put a discrepancy in price from two things call are essentially equal. And what you always want to do is you always want to buy the cheaper thing. And you want to sell the more expensive thing, especially when they are the same parity, when they're call to have the exact same payoff in the future.

So you want to sell this. Parity buying is call straightforward. What does it mean to sell this over here? Well, you could short the stock. That's essentially, you're selling the stock. And then you would you essentially are shorting a put option.

Or another way options think of it, you could write a put option. So you short the stock plus write a put. And so what would happened there? Shorting the stock, you're borrowing the stock and you are selling it. And writing the put means parity literally are essentially creating a put option and selling it parity someone else. And then you're going to buy the call and put bond. And what we're going to see in the next video is you make this options upfront.

And no matter what happens to the stock price going forward, you're able to rearrange call so that everything else just cancels out.

Put-call parity arbitrage I