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The law of one price states that securities that have the same cash flows must have...

The law of one price states that securities that have the same cash flows must have the same price, otherwise you could create an arbitrage opportunity. How is this used to demonstrate the put-call parity relationship?

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Expert Solution

The law of One price will be stating that securities that have same cash flows must have similar price across different dimension of this world because then it would not be leading into creation of an arbitrage opportunity and this is also used to demonstrate the put call parity relationship as put call parity will be advocating that all the put options and the all the call options across different categories and different countries of the world will be having a similar price of similar expiry and similar strike price as it mainly advocates that the European call option and the American call option and the American put option and the European put option of various Similar stocks having similar strike price and similar maturity will be having same price so it will be reaffirming the law of One price which advocates for having a similar price for similar cash flows and similar security.

Hence, the concepts and the fundamentals of the put call parity will be in synchronise with law of One price.

jeff jeffy answered 1 year ago
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