Parity

Posted in Finance, Accounting and Economics Terms, Total Reads: 354
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Definition: Parity

The term “Parity” means “equal”. It is used in a variety of contexts but it always means that” two things are equal”. In business, when the the prices, purchasing power, exchange rates etc are equal, it is called as parity. 


If the price of production or raw materials or inputs increases, there should be an increase reflected in  the selling price, which is known as parity price.


Parity price for Convertibles: The prices of the convertible Security is the same as the underlying stock is valued

Example: A convertible bond with a par value of $5000 can be exchanged for 50 shares of common stock. The convertible parity price would be ($5000/50 shares) = $100.


Options: When trading of options is being done at an intrinsic price


International Parity: When the currencies of two countries are similar, it is known as International Parity. Currencies are at parity when their exchange ratio is exactly 1:1.

Example: If a basket of commodities costs $100 in US and Rs 5000 in India – The law of One Price ensures that $1=Rs 50 (5000/100).

This is the exchange rate that should prevail to prevent Commodity Arbitrage.


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