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FURTHER ANALYSIS OF THE PUT‐CALL PARITY IMPLIED RISK‐FREE INTEREST RATE
Author(s) -
Frankfurter George M.,
Leung Wai K.
Publication year - 1991
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1991.tb00659.x
Subject(s) - parity (physics) , proxy (statistics) , economics , interest rate , interest rate parity , econometrics , financial economics , monetary economics , mathematics , statistics , physics , particle physics
In this paper the put‐call parity implied riskless rate of borrowing and lending is re‐examined. Using a rigorous model, it is shown that, given the level of an observable proxy of the risk‐free rate of lending (T‐bill rates, for example), the put‐call parity provides an opportunity to borrow at rates substantially below the market rate of lending. This is especially true when high interest rates prevail. The major conclusion is either that American option prices may invalidate the parity, or that option markets are not as frictionless as one might wish.