Call-put parity looks as follows:

[value of call] + [PV of exercise price] = [value of put] + [share price]

*from Brealey, Myers, Allen "Principles of corporate finance"

Take an example: share price = 50, strike price = 60 (for both call and put) Then:

value of call = 50 - 60 = -10

PV of exercise price = 60

value of put = 60 - 50 = 10

Then the equation doesn't hold.

I assume that PV of exercise price could be defined wrong but probably something else. I would very appreciate if somebody says where I'm wrong and provide correct example.

Thanks in advance

  • options can never have a negative value. – D Stanley Jan 10 '19 at 14:23

Your call value is incorrect. Common sense is that if it's 10 points OTM, it's going to be worth very close to zero. In your example, it can be verified with:

The basic formula for put/call parity is:

Call – Put = Stock – Strike.

If XYZ stock is $50, the strike is $60, and the put is $10 then the call must be zero.

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