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Adjustment to Risk Free Rate/ Violation of Put-Call Parity
Applied Economics and Finance
View Archive Info| Field | Value | |
| Title |
Adjustment to Risk Free Rate/ Violation of Put-Call Parity
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| Creator |
Simozar, Saied
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| Description |
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.
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| Publisher |
Redfame Publishing
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| Contributor |
—
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| Date |
2019-10-17
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion Peer-reviewed Article |
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| Format |
application/pdf
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| Identifier |
http://redfame.com/journal/index.php/aef/article/view/4521
10.11114/aef.v6i6.4521 |
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| Source |
Applied Economics and Finance; Vol 6, No 6 (2019); 80-96
2332-7308 2332-7294 |
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| Language |
eng
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| Relation |
http://redfame.com/journal/index.php/aef/article/view/4521/4744
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| Rights |
Copyright (c) 2019 Applied Economics and Finance
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