Parity Price

What is a ‘Parity Price’

When the price of one asset is closely connected to the price of another asset, this is referred to as a parity price. Known as the parity pricing idea, it is used to both stocks and commodities and describes the situation in which two items have the same worth.

To decide whether it is financially advantageous to convert a convertible bond into shares of common stock, convertibles, such as convertible bonds, employ the parity price concept, which is defined as the difference between the par value of the bond and the par value of the stock.

How Convertible Bonds Work

In the case of a convertible bond, the option to convert into a specified number of shares of common stock at a specified price per share is provided. Investing in convertible bonds is appealing to investors because they allow the owner to receive interest on a fixed-income investment while also having the possibility of converting into the company’s stock. The parity price of a convertible security is equal to the market price of the convertible security divided by the conversion ratio (the number of common stock shares received upon conversion).

Factoring in Commodities

A farmer’s expenditures, such as labor, loan interest, and equipment, are represented by the parity price of a given commodity. As stated in the Agricultural Adjustment Act of 1938, the parity price is the average price received by farmers for agricultural commodities over the previous ten years. If the parity price for a commodity is less than the current market price, the government may provide price support through direct purchases of the commodity.

Examples of Stock Options

Stock options are purchased by investors who want to get the right to acquire a specified number of stock shares at a specified price on a specific date. Stock options expire after a specified period of time.

For example, a $50 Microsoft call option indicates that the option holder has the option to purchase 100 shares of Microsoft common stock at a price of $50 per share before the option expires. Microsoft’s stock is trading at a market price of 60 dollars per share, hence its intrinsic value is equal to ($60 – $50), or $10 per share. If the price of the stock option is $10 as well, the option trade is considered to be at parity with the stock option.

Parity Price FAQ

What is a parity price?

When you compare two assets with the same worth, you are comparing parity prices. The context of parity prices varies based on the type of asset being traded. When converting bonds into shares of common stock, for example, it is the price at which investors may earn a return on their investment.

How do you calculate parity price?

The parity price of a convertible security is computed by dividing the market price of the convertible security by the conversion ratio (the number of common stock shares received upon conversion).

What is the conversion price of a convertible bond?

The conversion price of a convertible security is calculated by dividing the price of the bond by the conversion ratio of the convertible security. Divide $1,000 by 5, which equals $200, to find the conversion price of a bond with a par value of $1,000 in terms of dollars.

What is positive price parity?

Prices at various locations are measured in terms of purchasing power parity, which is an economic phrase. According to the law of one price, if there are no transaction costs or trade barriers for a given item, then the price for that good should be the same in all places where that commodity is sold.

What is trading at parity?

Because parity is the price at which an option trades at its intrinsic value, the value of a stock option may be determined by its parity price. Parity is also used to compare the worth of two currencies when comparing the value of two currencies.

What is parity share market?

Parity is defined as the state in which two or more objects are equal in value. To accomplish this conversion into common stock, a bondholder might refer to two securities that have the same interest rate, such as a convertible bond and the value of a share, in order to convert into common stock. The term 'par value' refers to the value of a bond that is near to parity.

Further Reading

    • Purchasing power parity, price indices, and exchange rate forecasts – [PDF]
    • The economics of import parity pricing: A pedagogical note – [PDF]
    • Real exchange rates and purchasing power parity: mean-reversion in economic thought – [PDF]
    • National price levels, purchasing power parity, and cointegration: a test of four high inflation economies – [PDF]
    • The Development of the Parity Price Formula for Agriculture, 1919-1923 – [PDF]
    • Put-call parity and market efficiency – [PDF]
    • The purchasing power parity puzzle – [PDF]
    • Threshold cointegration and purchasing power parity in the pacific nations – [PDF]
    • Purchasing power parity in economies in transition: evidence from Central and East European countries – [PDF]
    • Potential pitfalls for the purchasing‐power‐parity puzzle? Sampling and specification biases in mean‐reversion tests of the law of one price – [PDF]