We've been advocating strategies involving option combinations contemplating a proper computation of put call parity of the currency pairs. We are take this through why is it so important to shed some light on put call parity while using European options.
During the execution of strategies using European option combinations such as straddles, strangles or condors etc, the portfolio contains the same expiration value with two different currency derivatives instruments of same underlying currency then they must have the same present value.
Unlike spreads, here the most important thing to be kept in mind while executing strategies through option combinations is that any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist.
Else, arbitrager can go long on the undervalued portfolio and short the overvalued portfolio to make a risk free profit on expiration day.
Hence, taking into account the need to calculate the present value of the cash component using a suitable risk-free interest rate, we have to calculate and illustrate the Put call parity.


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