Finance · level 2
Put–call parity
Two portfolios with identical payoffs must have identical prices. That single sentence prices a put from a call, and explains why equity is a call on the firm's assets.
Worked example: Stock $69, a six-month call with strike $69 costs $6, risk-free 4%. No dividends. Price of the put with the same strike and expiry?
Step by step
- 1
Parity
P = C − S + PV(K)
- 2
PV of strike
$69 / 1.04^0.5 = $67.66
- 3
Put
$6 − $69 + $67.66 = $4.66
- 4
Why
Stock + put and call + risk-free bond pay the same at expiry, so they must cost the same today or an arbitrage exists.
Stock $69, a six-month call with strike $69 costs $6, risk-free 4%. No dividends. Price of the put with the same strike and expiry? = 4.66
The theory behind it
Intuition
Finance is time and risk applied to cash: move every cash flow to the same date at a rate that reflects its risk, then compare.
Common pitfalls
- ×Discounting a nominal flow at a real rate (or vice versa).
- ×Mixing enterprise-value and equity-value numbers in the same ratio.
In the interview
Valuation, WACC, LBO and accretion rounds — where a wrong bridge is a wrong answer.