Put-call parity: Answer Guide 2027
Put-call parity is the no-arbitrage relationship linking the prices of European puts and calls with the same strike and expiry: call − put = stock price − present value of strike. In a put call parity interview, state the formula, explain the replicating-portfolio logic, and know what breaks it.
Put Call Parity Interview Questions: What They Test
The logic: a long call plus short put (same strike, same expiry) replicates owning the stock financed at the risk-free rate — both payoffs equal stock minus strike at expiry. If the two sides ever diverged, arbitrageurs would buy the cheap side and sell the dear side for a risk-free profit, forcing them back in line.
Interviewers want the applications. Parity lets you synthesize positions — a long call equals long stock plus long put plus borrowing — and it is the backbone of conversion/reversal arbitrage. It also prices the forward: rearranging gives the implied forward price of the stock. What breaks it: American options (early exercise), dividends, and transaction costs — parity is exact only for European options on non-dividend stocks in frictionless markets.
How to Answer a Put Call Parity Interview Question
- State the formula. "C − P = S − PV(K) — call minus put equals stock minus discounted strike."
- Explain the replication. "Long call plus short put has the same expiry payoff as owning the stock — so their prices must match."
- Give a use. "Synthesize any position from the others, or extract the market's implied forward price."
- State the limits. "Exact for European options; American early-exercise rights and dividends break the clean equality."
Common Mistakes in Put Call Parity Interview Answers
- Forgetting the conditions. Same strike, same expiry, European style — omitting any condition voids the relationship.
- Ignoring dividends. Expected dividends shift the parity — the stock leg must be adjusted.
- Claiming it prices options. Parity relates put and call prices to each other — it does not set their absolute level.
Put-call parity is the closest thing options have to a law of physics — formula, replication logic, and the European-only caveat is full marks.
Keep Reading
- why this role morgan stanley
- guesstimate interview question
- Rothschild Spring Week 2027: Application, Assessment & Interview
- Rothschild Summer Analyst 2027: Application Process, Step by Step
FAQ
Q: What is the put-call parity formula? A: C − P = S − PV(K): the call price minus the put price equals the stock price minus the present value of the strike.
Q: Why must put-call parity hold? A: Because a long call plus a short put replicates a forward position in the stock — any price divergence would create risk-free arbitrage.
Q: Does put-call parity work for American options? A: Not exactly — early exercise rights introduce inequalities rather than a strict equality.
Q: How do dividends affect put-call parity? A: Expected dividends reduce the effective stock price in the formula, so the parity relationship must be adjusted for them.
Preparing for Morgan Stanley's interview? Our 2027 Morgan Stanley Online Assessment and Video Interview Tutorials has practice questions and answers — $79 one-time, instant download.
