What is the use of put call parity?
The put-call parity basically explains the relationship between put, call, stock and bond prices. It is expressed as: S +P/C + X / (1+r)t Where: S Current index level ,X Exercise price of option ,T Time to expiration ,C Price of call option ,P Price of put option ,R Risk-free rate of interest The above expression shows that the value of a European call with a certain exercise price and exercise date can be deduced from the value of a European put with the same exercise price and date and vice versa. It basically means that the payoff from holding a call plus an amount of cash equal to X / (1+r)t is the same as that of holding a put option plus the index. Consider the following two portfolios: Portfolio A; one European call option plus an amount of cash equal to Xe-r(T-t). Portfolio B; one European put option plus one share. Suppose that the stock prices is$31, the exercise price is $30, the risk free interest rate is 10% per annum, the price of a three month European call option is $3,
