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

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  • Saied Simozar

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.

Suggested Citation

  • Saied Simozar, 2019. "Adjustment to Risk Free Rate/ Violation of Put-Call Parity," Applied Economics and Finance, Redfame publishing, vol. 6(6), pages 80-96, November.
    • Handle: RePEc:rfa:aefjnl:v:6:y:2019:i:6:p:80-96
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    put-call parity; discount function; risk-free rate; options; forward pricing;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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