FURTHER ANALYSIS OF THE PUT‐CALL PARITY IMPLIED RISK‐FREE INTEREST RATE

George M. Frankfurter, Wai K. Leung

Research output: Journal PublicationArticlepeer-review

4 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)217-232
Number of pages16
JournalJournal of Financial Research
Volume14
Issue number3
DOIs
Publication statusPublished - 1991
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance

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