1. What is Put-Call Parity in Forex?

Put-call parity is a fundamental principle in options pricing that defines the relationship between the price of European put and call options with the same strike price and expiration date. In forex, it helps maintain no-arbitrage conditions between currency options.

2. How Does the Calculator Work?

The calculator uses the Put-Call Parity formula:

Where:

• \( Call \) — Call option premium (USD)
• \( Put \) — Put option premium (USD)
• \( Spot \) — Current spot price of the currency pair
• \( Strike \) — Strike price of the options
• \( r \) — Risk-free interest rate (decimal)
• \( t \) — Time to expiration (years)

Explanation: The formula shows that a call option can be replicated by buying a put option, buying the spot currency, and borrowing the present value of the strike price.

3. Importance of Put-Call Parity

Details: Put-call parity is crucial for options traders to identify arbitrage opportunities, price options correctly, and construct synthetic positions. It ensures consistency between put and call prices, spot rates, and interest rates.

4. Using the Calculator

Tips: Enter all values in USD terms. The interest rate should be in decimal form (e.g., 0.05 for 5%). Time to expiration should be in years (e.g., 0.5 for 6 months).

5. Frequently Asked Questions (FAQ)

Q1: Does put-call parity apply to American options?
A: No, put-call parity strictly applies only to European options. American options can be exercised early, which may create deviations.

Q2: What if the calculated call price differs from market price?
A: Significant deviations may indicate arbitrage opportunities or market inefficiencies.

Q3: How does interest rate affect put-call parity?
A: Higher interest rates generally increase call prices relative to puts due to the time value of money.

Q4: What assumptions does put-call parity make?
A: It assumes no arbitrage, no transaction costs, no dividends, and the ability to borrow/lend at the risk-free rate.

Q5: Can this be used for all currency pairs?
A: Yes, but ensure all inputs are properly converted to USD terms for the calculation.