Put call parity

[TheCasanova2012]

omg~ you save my life i have finace exam in 4 days i've been trying to get idea how this work by reading and doing some exam question relate to this but can't get clear view.. but now i am so THANK YOU SO MUCH TOU ARE HERO.

[bionicturtledotcom]

@TheCasanova2012 Thanks, I'm thrilled to help.

[pankajrajput7]

Great Job! keep it up...

[bionicturtledotcom]

Fantastic, love to help!

[carocip]

Thank you sooooooo much! You saved my day!

[dharmishaaaa]

Probably the best explanation of put-call parity, after a whole few days of scratching my head whilst reading through my lectures, I know get this, bring on my exam on the 24th!

[bionicturtledotcom]

@dharmishaaaa thank you, i really appreciate that!

[dajieda0]

I have a question: the premium which is the price of the call option is paid when the contract is signed. Is this price ($3) a present value or a future value ($3 one year later which is less than $3 today)? Thanks.

[TheSchola3000]

ok but the chances of being able to use a call options and put options with the same stock is a small percent chance isnt it?

[TheAlperino]

how do I get the dividend in this formula?

[aby007]

Thank you so much.

[viljamiini]

thank you for clarifying this.

[chadobomber]

Scweser Level II has nothing on you, nice explanation

[bionicturtledotcom]

@chadobomber that is the nicest thing anybody said to me today. Thank you so much!

[ap8415]

David i had read Put-Call Parity in Hull and i am slightly confused here about c and p.According to hull c is the value required to buy one share in call option while from your video it seems c is the return value which call option is giving on expiration.Kindly help

[bionicturtledotcom]

@ap8415 that's right that (c) is the price/value of a European style call option. But, also, in put-call parity is just reflects "long one call option" such that, under any future asset price scenario, the future payoff of [long call plus discounted cash/strike] is equal to protective put [long stock plus long put option]. So the illustration of the strategy payoffs illustrates (validates) the put-call parity

[bionicturtledotcom]

@ap8415 put another way, put-call parity (necessarily) works BOTH for future payoff scenarios (as i illustrate here) AND, to your point, in a present value valuation: S(0)+p = c + K*exp(-rT)

[ap8415]

@bionicturtledotcom Thnx a lot sir...i am now clear with this

[oligiscool1]

It should be noted that this version of put-call parity applies for a non-dividend paying stock. Put-call parity with a dividend term yield of d over the same period would be c+Ke^-rT=p+Se^-dT.

[bionicturtledotcom]

@oligiscool1 yes, agreed, thank you for making the point: this applies to a non-dividend stock

[Bierbaron123]

thanks mate! Very helpful!!

[scotie11]

that was very helpful

[HeyTheGigIsUp]

that's also known as a synthetic long (or short). good to reduce margin costs and could possibily present an arbitrage opportunity,

[MsExploits]

Very  helpful!!!!. :)

[mikemakardi]

I think he made a mistake saying that you borrow money to exercise in the future - bond. We lend money today to have the the future value. He should have said we lend money.

[icebeating]

He took the call option which mean he had to buy to the bond, assuming that the buyer doesn't have money now ==> he have to borrow to long the call option.

[graduatefast]

Thanks alot. Explained really well.

[kavindu123]

thanks was very useful

[genliter]

To exercise the call at its expiry, the call holder has to hold that amount money K. How would he get this money? Obviously, an investment on bonds is a choice.

[jonnycycler]

The call option gives you the right to buy the underlying at maturity (the price of the underlying, in this case, the stock is higher than the strike price). The bond will then give you the money to actually buy the underlying at maturity (at the agreed price in the option contract which will probably be the same as the nominal of the bond).

[jonnycycler]

But in reality option contracts are automaticaly cash settled meaning that at expiry the positive difference between the underlying and the strike price is being transfered into your account.

[whoosh000]

I understand the call, put, and stock variables in the equation, but how does the bond come in?? Why does put-call parity have anything to do with bonds?

Great videos!

[tr7120]

The bod in the equation is just a way to present the parity. You can replace the bond with cash of $10 on the expiration date. So now your portfolio consist of a call + discounted cash amount. This money will be used to exercise your call option (if in-the-money).

The point is the portfolio value is somewhere between K and S, in other words MAX(K,S).

Hope this helps.

Great videos!