Put-call parity arbitrage II | Finance & Capital Markets | Khan Academy

Put-Call Parity Arbitrage II. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/put-call-parity-clarification?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/put-call-options/v/put-call-parity-arbitrage-i?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Options allow investors and speculators to hedge downside (or upside). It allows them to trade on a belief that prices will change a lot--just not clear about direction. It allows them to benefit in any market (with leverage) if they speculate correctly. This tutorial walks through option basics and even goes into some fairly sophisticated option mechanics. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy

Comments

1. This is all nice, but if we have to wait until expiration for "everything to cancel out," why not just buy the bond outright in the first place, and collect the $5 of interest at expiration?
2. There is many factors missing from this video... i.e the premiums for the short put and the long call..
3. In the 2nd senario , I have a dissatisfaction with your explanation . What if the stock price goes up to 71 instead of 70 at expiration ?
   35 from bond p+ 35 from call won't make it 71 . So obviously , the explanation should've been , " we already bought the stock worth 70 at 35 due to the call option and we will use this stock to cover the short sell"
4. Anyone knows how to do this one?
   
   Consider a put option on Stock A with maturity 2 years and strike 13 EUR. The put option premium is 3.6045 EUR, and the stock's spot price is 10 EUR. If the risk free rate is 4.50%,
   What is the premium of a call option with the same strike price and maturity as the put option?
5. how does the put & call option be valued at $12& $8? if current stock price is $31 and option strike is $35, shouldn't them be $4 and $0 ?
6. I'm confused. Why would you not say that you would make -$8 from call, $31 from short sale, -$23 from put, $5 from bond for a grand total of $5 in the end???
7. @Pharaohilife
   Arbitrage means you exploit the conditions and make profit. In the present video you have zero investment and you are ended up with profit of $5. By employing this parity you are able to buy the bond with zero money. 
8. Eminog016 is correct, and the video is wrong.  This video mistakes the bond appreciation to arbitrage.  The 2 options ARE IN parity and NOT out of parity.
   
   he said....
   eminog016 months ago
    
   They do have the same price, but the video implies that the arbitrage is the source of the 5 dollar profit and that the user should be doing this arbitrage in this situation because it makes the user 5 dollar profit. That is not correct. Instead, the profit is from the appreciation of the bond. The user could have done no arbitrage and still made the profit.
9. when you factor in commissions, arbitrage opportunities are even more rare
10. They do have the same price, but the video implies that the arbitrage is the source of the 5 dollar profit and that the user should be doing this arbitrage in this situation because it makes the user 5 dollar profit. That is not correct. Instead, the profit is from the appreciation of the bond. The user could have done no arbitrage and still made the profit.
11. But a main assumption underlying the put-call parity is that they both have the same strike price, which in this example is $35. Put-call parity wouldn't hold if they were different.
12. This is a pretty poor example because the p and c are equal at S=35. There is no real arbitrage going on in this example, only the appreciation in value for the bond. The arbitrage makes $0 but the appreciation in the bond makes the $5. Arbitrage could arise if the put was valued at 100, in which case selling it took in $131. Buying the call and bond costs $38 but appreciates in value to $43. The net result is a profit of 131-43=$88 from arbitrage, and $5 from the bond, so $93.
13. I get how everything cancels out and you make $5 profit. But if the bond goes from $30 to $35 then the bond by itself makes $5, does it not? What is the difference between buying the bond by itself and doing the whole parity arbitrage method? am I missing something?
14. @falleruen you are right :)
15. and in case of stock went up to $70, you would have bond worth for $35 and call to buy stock at $35, so no matter how the stock price went up, we still could offset the stock borrowing by call option. Therefore, we not only make $5 arbitrage profit, but $35 bonds as well at expiration. Am i right? if not please help me correct it, thank you :)
16. i got confused. we borrow and sell stock at 31, in case of stock went down in the future, we would have $35 bonds to offset stock at $35 from put holders, so we would have stock. but we borrowed stock at $31 and now we give stock back, for example, current price at $20, we have made 31-20=$11 additional profit from shorting stock, so the total profit not only $5, but $16 right?
17. WTF I'm confused make the videos longer plox like the other finance videos that's how I like em
18. This only works for European put and call options. If you issue an american put option, an individual could exercise their put before the bond matures.
19. I am always wondering why not just exercise the call option at 35 (scenario 2) to cover for our short. With that said would we not have a gain of 40?
20. Excellent explanation. Clear and concise. Thank you!