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Parity

• Is the point where a convertible security equals the converted value of the underlying instrument.

 
 Embedded terms in definition
 Convertible security
Convertible
Point
Security
Underlying
 
 Referenced Terms
 Conversion value: Also called Parity value, the value of a convertible security if it is converted immediately.

 Interest rate parity theorem: Interest rates in different countries are generally different because of the differences in inflation rates. Interest rate Parity holds if the differences in interest rates are exactly offset by differences in inflation rates and the resulting currency depreciation. Assume that the risk-free interest rate in the US is 5% and in Mexico 15%. Assume that it takes 10 pesos to USD now and one-year forward price is 10.952381 MP/USD. If you invest $1000 now, next year, you end up with $1050 USD. If you convert $1000 into pesos now, you end up with 10,000 MP, lend them at 15%, and end up with 11,500 MP, convert them back into USD at the forward price of 10.95, you end up with exactly $1050 USD next year, which is exactly the same as if you lent in the US. This is an example of interest rate parity.Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate.

 Market conversion price: Also called conversion Parity price, the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

 Spot futures parity theorem: Describes the theoretically correct relationship between spot and futures prices. Violation of the Parity relationship gives rise to arbitrage opportunities.

 
 Related Terms
 Conversion parity price
Debt service parity approach
Interest rate parity theorem
Parity value
Purchasing power parity
Put call parity relationship
Relative purchasing power parity
Spot futures parity theorem

<< Parameter Parity value >>

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