Generalized Put-Call Parity

22 Pages Posted: 2 Jan 2007 Last revised: 21 Aug 2008

See all articles by David F. Babbel

David F. Babbel

University of Pennsylvania - The Wharton School - Finance and Insurance Departments; CRA International

Larry Eisenberg

New Jersey Institute of Technology

Abstract

The standard put-call parity result does not include equalities based on buy-and-hold strategies for options on the minimum or maximum of two risky assets and for quantity-adjusting options. This article generalizes put-call parity to these contracts. International put-call parity relations and the pricing of a new forward contract, an absolute-value spread forward, is derived from the put-call parity generalization to options on the minimum or maximum of two risky assets. Finally, an inequality comparing the price of quantity-adjusting options to portfolios of standard options is presented, showing that the QAO contract, in the absence of arbitrage opportunities, is cheaper than the portfolio of standard currency and equity contracts which might be used to hedge the domestic value of a foreign portfolio.

Keywords: put-call parity, quantos, foreign exchange, options

JEL Classification: G13

Suggested Citation

Babbel, David F. and Eisenberg, Laurence K., Generalized Put-Call Parity. Journal of Financial Engineering, Vol. 1, No. 3, pp. 243-263, 1993, Available at SSRN: https://ssrn.com/abstract=954172

David F. Babbel (Contact Author)

University of Pennsylvania - The Wharton School - Finance and Insurance Departments ( email )

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Laurence K. Eisenberg

New Jersey Institute of Technology ( email )

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