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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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The Put-Call (Options) Parity

The Put-Call (Options) Parity

Abdulla Javeri

30 years: Financial markets trader

In this video Abdulla outlines the concept of Put-Call Parity and how to formulate it into an expression and get all six combinations (long and short positions). He describes the arbitrage-free relationship between call and put premiums for European options. Perhaps most importantly, Abdulla explains how to take advantage of risk-free profit that arises from arbitrage opportunities

In this video Abdulla outlines the concept of Put-Call Parity and how to formulate it into an expression and get all six combinations (long and short positions). He describes the arbitrage-free relationship between call and put premiums for European options. Perhaps most importantly, Abdulla explains how to take advantage of risk-free profit that arises from arbitrage opportunities

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The Put-Call (Options) Parity

6 mins 1 sec

Key learning objectives:

  • Describe the put-call parity

  • Understand how to calculate the fiduciary call

  • Identify one of the keys to understanding the put-call parity

Overview:

Put–Call parity is an important concept in the option world. The original Black Scholes model priced a European call option on a non-dividend-paying stock. The price of the equivalent put option was derived using the concept of Put-Call Parity.

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Summary

What is the put-call parity?

The put-call parity defines the arbitrage-free relationship that determines the connection between the call premium and the equivalent put premium, under the following conditions:

  • European style options
  • Same underlying assets
  • Same expiry
  • Same strike

Given a call premium the put premium must be at a level consistent with Put-Call Parity so that the actual futures price and the synthetic futures price are identical, excluding transaction costs.

How do we calculate the fiduciary call?

Fiduciary call - Protective put. This relationship can also be expressed as;

call premium plus present value of the strike equals put premium plus stock.

What is one of the keys to understanding the Put-Call Parity?

  • The understanding that by combining positions in two out of the following three elements Future, call and put, we can synthetically create a position in the third element
  • It can be encapsulated in the simple expression, F = C – P. What this says is that a long futures position plus F, can be synthetically created by combining a long call plus C and a short put minus P
  • By rearranging the expression we can get all six combinations, reflecting the long and short positions for each. For example, buying a call and selling a future gives us a long put position.  Similarly selling a future and selling a put gives us a short call position

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Abdulla Javeri

Abdulla Javeri

Abdulla’s career in the financial markets started in 1990 when he entered the trading floor of the London International Financial Futures Exchange, LIFFE, and qualified as a pit trader in equity and equity index options. In 1996, Abdulla became a trainer for regulatory qualifications and then for non-exam courses, primarily covering all major financial products.

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