Application of the Put–Call Parity Formula on a 3 – Month OMX Stockholm 30 Index Option Contract to Show Any Evidence of Arbitrage

In this article, we test the put –call parity formula on a 3 – month OMX Stockholm 30 index option contract to show any evidence of arbitrage. The purpose of arbitrage is to buy the underpriced contract and sell the overpriced contract to record an arbitrage profit. We will illustrate through an example violation of put – call parity of underpriced and overpriced call and put contracts. The difference that arises from buying and selling call and put contracts is the arbitrage profit. On the other hand, a short call and a long put position with the same strike price and expiry date result in a riskless hedge position. In this case, we did not have arbitrage, as the return of the portfolio from the selling and buying of contracts will be not greater than the risk-free rate of interest