The Put Call Parity Calculator is an invaluable resource that enables individuals to assess the relationship between call and put options, providing a means to determine potential discrepancies in option prices. Its fundamental purpose lies in the equilibrium between European call and put options, simplifying the estimation of the underlying asset’s price, considering the strike price, interest rate, and time to expiration.
Formula of Put Call Parity Calculator
The fundamental formula governing the Put Call Parity Calculator is:
C – P = S – (X / (1 + r)^T)
Where:
- C represents the price of a European call option.
- P denotes the price of a European put option.
- S signifies the current price of the underlying asset, such as a stock.
- X stands for the strike price of the options.
- r denotes the risk-free interest rate.
- T represents the time to expiration in years.
This formula serves as the cornerstone for calculating the equilibrium between call and put options, aiding in understanding and predicting market movements.
General Terms Table or Relevant Calculations
| Term | Definition |
|---|---|
| Underlying Asset | The actual asset that an option contract is based on. |
| Strike Price | The predetermined price at which an option can be exercised. |
| Risk-Free Interest Rate | The interest rate of a risk-free investment. |
| Time to Expiration | The duration until an options contract expires. |
Example of Put Call Parity Calculator
Let’s consider an example to elucidate the practical application of the Parity Calculator. Suppose a European call option is priced at $5, a European put option at $3, the current asset price stands at $50, the strike price is $45, the risk-free interest rate is 4%, and the time to expiration is 1 year. Using the Put Call Parity formula, we can determine the equilibrium value, offering insights into the market dynamics.
Most Common FAQs
The calculator aids in determining the equilibrium between call and put options, facilitating better decision-making in the options market.
While it doesn’t predict movements outright, it helps in understanding price discrepancies between options.