The formula to calculate Put-Call Parity is:
\[ C + PV(x) = P + S \]
Where:
The present value of the strike price is calculated as:
\[ PV(x) = \frac{\text{Strike Price}}{(1 + \text{Risk-Free Rate})^{\text{Years to Expiry}}} \]
Put-Call Parity is a financial principle that defines the relationship between the price of European put options and European call options of the same class, with the same strike price and expiry date. The principle ensures that arbitrage opportunities do not exist in the options market.
Let's assume the following:
Step 1: Calculate PV(x):
\[ PV(x) = \frac{12}{(1 + 0.03)^2} = 11.31 \]
Step 2: Verify the Put-Call Parity:
\[ 2 + 11.31 = 1 + 11 \implies 13.31 = 12 \]
Therefore, the Put-Call Parity holds true in this example.
