EconPapers    
Economics at your fingertips  
 

Adjustment to Risk Free Rate/ Violation of Put-Call Parity

Saied Simozar

Applied Economics and Finance, 2019, vol. 6, issue 6, 80-96

Abstract: The present value of a forward contract for any asset that does not pay a dividend is calculated by discounting its forward price by the risk-free rate. We show that the discount function for assets that have a non-zero correlation with interest rates, has to be adjusted to account for the correlation between the asset and interest rates. Put-Call parity is also violated and needs to be adjusted as well for such assets. It is shown that the risk-free rate is asset dependent. The adjustment to the price is small for short dated forwards, but increases quadratically with time to maturity.

Keywords: put-call parity; discount function; risk-free rate; options; forward pricing (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://redfame.com/journal/index.php/aef/article/view/4521/4744 (application/pdf)
http://redfame.com/journal/index.php/aef/article/view/4521 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rfa:aefjnl:v:6:y:2019:i:6:p:80-96

Access Statistics for this article

More articles in Applied Economics and Finance from Redfame publishing Contact information at EDIRC.
Bibliographic data for series maintained by Redfame publishing ().

 
Page updated 2020-01-02
Handle: RePEc:rfa:aefjnl:v:6:y:2019:i:6:p:80-96