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Parity Plus Basis


A part of the fair value of an option; an option value that includes, in addition to the intrinsic value, the fair value of the forward underlying the option contract. In liquid markets, the forward value of a call option (a European call) is almost consistently above its intrinsic value (of course by the fair value of the forward) unless there is some sort of expected gains (like dividends) that the call holder would receive before expiration. The opposite is true for a put option (European put), i.e., its forward intrinsic value is almost invariably below its intrinsic value unless there are expected payments prior to expiration.

The parity plus basis is the difference between the option’s value value and insurance value.

Parity plus basis = fair value of option – insurance value

The insurance value is the option’s insurance premium or time value (the risk premium charged by the seller (writer) of the option against giving the buyer the right to trade the underlying up to expiration date).

The parity plus basis is also known as forward intrinsic value or fair value premium.



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