When P-C parity does not hold

tommcginnis said:
"...However, it is possible to use arbitrage arguments to obtain upper and lower bounds for the difference between the price of an American call and the price of an American put." [Hull, as above.]

I know -- you missed this part.
:D
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Nope, didn't miss this at all
... have a look at my post #37 above where I said Put-Call parity for American Style Options does not hold but there is a chain of inequalities ( the boundaries you refer to )
pcp_AmericanOptions_Dividend_#2.png
 
jamesbp said:
Nope, didn't miss this at all
... have a look at my post #37 above where I said Put-Call parity for American Style Options does not hold but there is a chain of inequalities ( the boundaries you refer to )
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• what produces the inequality(ies)?
• are the inequalities stable? Monotonic?
and then, of course,
• what role for arbitrage?

:wtf:

You're in a loop. Break out.
Read something besides Hull, and see where they agree/disagree in their simplifications.
Read Hull's reference list. When you don't see 100% correspondence, stop there and re-read.
 
tommcginnis said:
• what produces the inequality(ies)?
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The possibility of early exercise ... but probably beyond the scope of this thread ... it would have been a much more interesting discussion to explore this issue and it's effect on option prices before the thread was hi-jacked by the put-call vigilantes who insisted put-call parity holds for American Options ... when it clearly does not ...

Baozi originally asked under what circumstances might put-call parity break down .... and I simply suggested that p-c parity does not necessarily hold for American style options that allow early exercise ... the question has been asked and answered ... supported with worked examples / respected academic references ... although I doubt the vigilantes understand or accept the point ...
 
jamesbp said:
Baozi originally asked under what circumstances might put-call parity break down .... and I simply suggested that p-c parity does not necessarily hold for American style options that allow early exercise ... the question has been asked and answered ... supported with worked examples / respected academic references ... although I doubt the vigilantes understand or accept the point ...
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Thanks man!
 
i would advise those interested to familiarize themselves with representation theory, in particular lie goups, matrix exponentials over C, uniqueness of primary decomposition of a three manifold and its representation in the levy characteristics for a memoryless process or quite specific generator for the sigma algebra, not too complicated here, specifically applications to hyperbolic partial differential equations. its all there already but sometimes it seems like they dont even realise the implications of the results they have proved.
 
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sorry. it would not hold if you got delivered the underlying in the option but the forwards market was cash settled or restricted say. in general the bid ask would be so large as to make the p-c relationship impossible to arbitrage in the most liquid markets (they are usually bid well below intrinsic value say). there would be endless examples you could come up with to do with the specifics of the contract and dividends and the delivery. with non deterministic interest rates it would not hold. it probably is much more often than not not even close tbh. the majority of the pnl in a bank is from funding arbitrage so how do you margin a fwd or whatever its a mess forget it. if you have not the atm stike on the option (same strike as forard) it would not hold except under very specific measure changes so like on vix say if you did a vix forward and a call verus a put the cash position which needs to carry at some rate even if it was unique in dollars say (which its not as per above) would not hold on vix even theoretically.
 
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Robert Morse said:
I'm not confusing anything and very confident in my knowledge and comments.
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Bob ... I presume that if John Hull states that "Put-Call parity does not hold for American Options" you now accept this is the case, even if you don't necessarily understand why ...
 
Ha, and who's this John Full? For sure some academic who doesn't understand shit about trading, har har. Does he have a youtube channel, at least?
 
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