Call-put parity interprets about the relationship between or among the puts, calls and the

underlying futures contract. Both the put as well as call options requires to acquired the same

strike price, underlying asset and expiration date so as to be in the identical class. It can not be

applied over an America option due to we can exercise them before the period of expiry date.

Suppose, the put-call parity is violated then only the arbitrage opportunities arises. It can be

determined through the formula i.e. C + PV(x) = P + S. In case the put and call options prices

goes into the diverse direction then the relationship will not hold an arbitrage opportunity which

depicts that the sophisticated traders would acquire or earn of a risk-free profit (Peskir &

Shiryaev, 2002).

The Black-Scholes model which is also known as Black-Scholes-Merton (BSM) model is one of

the key mathematical equations of modern financial technology which is widely used to price of

the options contracts. It is taken into consideration so as to estimates of the theoretical value of

derivatives other investment instrument (Kythe, 2018).

The Black-Scholes model needs of the five input variables: volatility, strike price of an option,

current stock price, risk-free rate, time to expiration.

C(S, t) = N(d1)St – N(d2)ke-rt

Where,

C(S, t) is the call option price at time ‘t’ on a stock price with the price ‘S’

T is concerned with the time which is left until the date of expiration.

S is the current price of an underlying asset

K is related with strike price of the call option

R is risk free interest rate

Sigma is the implied volatility of underlying stock

Implied volatility is derived from the Black-Scholes formula from which it can provide

significant benefits towards an investor. Similarly, it provides an estimation of the future

variability for the underlying asset options contract. The Black-Scholes model is applied for the

price options. With the more volatile stock, it acquired higher options due to they offer greater

profit. It have odds of breaching strike price before the expiration date. If the time is more then

there is left of the higher chances of underlying asset price moving above the strike price.

Moreover, call option prices would be greater if there is higher in the underlying price, longer in

the expiration time and volatility is higher as well as the risk-free rate is higher from which there

would be lower in the exercise price. Nevertheless, the put options would be higher if there is

higher in the exercise price and the volatility and put options will be lower unless higher in the

risk-free rate and underlying price. Lastly, an arbitrage opportunity is cause if there is deviation

between value of puts and calls with the same strike price (Renog, 2022). Risk opportunities

identifies of an arbitrage opportunity in which the simultaneous purchasing and selling of the

options and securities result in reduced.

References

Peskir, G., & Shiryaev, A. (2002). A Note on the Call-Put Parity and a Call-Put Duality. Theory

Of Probability & Its Applications, 46(1), 167-170. https://doi.org/10.1137/s0040585x97978841

Renog, L. (2022). What Is the Black-Scholes Model?. Investopedia. Retrieved 13 March 2022,

from https://www.investopedia.com/terms/b/blackscholes.asp#:~:text=The%20Black

%2DScholes%20model%2C%20aka,free%20rate%2C%20and%20the%20volatility.
Kythe, P. (2018). Black-Scholes Model. Elements Of Concave Analysis And Applications, 7(12),

271-304. https://doi.org/10.1201/9781315202259-12