Parity
Candlefocus EditorThe concept of parity is closely related to many concepts in the field of economics, such as arbitrage, opportunity cost, and parity pricing. Parity pricing refers to the balance of a purchase or sale price, or exchange rate, between two different assets or currencies. Arbitrage is the practice of taking advantage of different prices in different markets to make a profit. Similarly, an opportunity cost is the difference of the potential profit that could have been earned if an investment was made in another asset rather than the one it was invested in.
Parity price is used in different contexts, depending on the type of asset. For example, in stock markets, parity price is the price at which it becomes profitable for investors to convert their convertible bonds into shares of common stock. In the foreign exchange market, parity is typically used to compare the value of two currencies, such as US Dollars and Euros. Furthermore, when evaluating a wide array of commodities, such as metals, energy, food, and housing, parity is used to determine the price equilibrium within a market.
As such, parity prices are relied upon by many investors and traders to accurately compare the relative values of different markets, assets, or currencies. This ensures that an investment is made at an optimal price point and an accurate assessment of a market's value can be achieved. By understanding and applying parity prices to one's trades, an investor can have a better understanding of the potential upside to an investment and consequently, better chances of success.