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VALUING CALL OPTIONS ON SINGLE STOCK FUTURES: DOES THE PUT-CALL PARITY RELATIONSHIP HOLD IN THE SOUTH AFRICAN DERIVATIVES MARKET?

A Biebuyck, JH Van Rooyen

DOI: 10.22495/rgcv4i3art4

Abstract

Research has shown that violations of put-call parity do occur and that these violations present an investor with opportunities to profit from arbitrage deals. Mispricing may lead to significant superior returns and maximisation of shareholders’ wealth if found and acted upon in a timely manner. This study attempts to determine whether this mispricing of financial derivatives is present in the South African derivatives market. This will be achieved through the valuation of options on single stock futures using the put-call parity relationship. The theoretical fair values obtained, is compared to the actual market values over a period of three years, that is, from 2009 to 2011. The results show that arbitrage opportunities do present themselves for the chosen shares. Further research may involve more shares over a longer period to determine whether any pattern may exist which may form the basis of an arbitrage trading strategy.

Keywords: Put-Call Forward Parity, Arbitrage Trading, Mispricing, Violations

How to cite this paper: Biebuyck, A., & Rooyen, J.H. (2014). Valuing call options on single stock futures: Does the put-call parity relationship hold in the South African derivatives market? Risk governance & control: financial markets & institutions, 4(3), 30-43. doi:10.22495/rgcv4i3art4

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