IAI Actuarial Core Principles · Economic Modelling · Principles of option pricing
Which statement about put-call parity for European options on a non-dividend-paying share is correct?
Put-call parity for European options is a model-free no-arbitrage relationship. It follows from identical terminal payoffs of two portfolios, so it does not need lognormality, Black-Scholes or any assumption about risk aversion.
- AIt requires the Black-Scholes model to hold for the share price
- BIt requires the share price to follow a lognormal distribution
- CIt holds for American options as an exact equality
- DIt depends on the investors' risk aversion
- It is a model-free no-arbitrage relation, independent of the distribution of share priceCorrect
Explanation
Parity comes from comparing the payoffs of portfolios at expiry, so no model for the share price is needed. For American options only inequalities hold, and risk preferences are irrelevant.
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