How do I use put-call parity as a replication map?

Question

AcadiFi · Accepted Answer

Use put-call parity by comparing two packages that produce the same expiration payoff:

- `Call + PV(strike)`
- `Put + Stock`

If both packages cost the same today, parity holds and there is no arbitrage. If one side is cheaper, the cheaper package can be bought and the more expensive package sold, assuming the exam setup allows the usual no-arbitrage assumptions.

The fastest way to avoid confusion is to label the sides as payoff packages rather than memorizing the formula as isolated symbols.

```mermaid
flowchart TD
    A["Put-call parity"] --> B["Call + PV(strike)"]
    A --> C["Put + stock"]
    B --> D["Same expiration payoff"]
    C --> D
    D --> E["Same current price means no arbitrage"]
    D --> F["Different current price means arbitrage direction"]
```

How do I use put-call parity as a replication map?

Master Level I with our CFA Course

Related Questions

Related Articles

Practice Questions