What is Put-Call-Forward Parity?

Put-Call-Forward Parity Definition. Put-Call-Forward Parity, or “PCFP”, is a theory that defines a relationship between a call option and a put option where the price has been established by the forward market. Assuming that each option has the same strike price and expiration date, if both options are “at the money” forward, the intrinsic value of the call option in one currency should equal the value of the put option in the other currency. PCFP differs from an associated term called Purchasing Power Parity, or “PPP”, that states that the price of a good in one country should equal the price of the good in another country after applying the applicable forex exchange rate. PPP is not always the case. A popular measure of the lack of PPP is the MacDonald’s “Big Mac” index that compares the current prices for the popular hamburger in a variety of countries. The Economist publishes the index from time to time. In July 2010, a Big Mac goes for $3.73 in the U.S., but will cost you $4.33 in the Euro area. However, it will only cost $1.95 in China, suggesting from this perspective that the Yuan is seriously undervalued.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.