Parity Price

AAA

DEFINITION of 'Parity Price'

When the price of an asset is directly linked to another price. Examples of parity price are:

1. Convertibles - the price at which a convertible security equals the value of the underlying stock.
2. Options - when an option is trading at its intrinsic value ("trading at parity").
3. International parity - official rates for a currency in terms of other pegged currencies, typically the U.S. dollar.

INVESTOPEDIA EXPLAINS 'Parity Price'

Parity price is commonly used in the context of convertible securities and often referred to as "conversion parity price" or "market conversion price". It is the price an investor effectively pays to exchange or convert a convertible security into common stock and is equal to the price of the convertible security divided by the conversion ratio (the number of shares that the convertible can be converted into). Conversely, in the case of common stock, it is calculated by dividing market value by the conversion ratio.

In agricultural commodities, you can think of parity price as the purchasing power of a particular commodity relative to a farmer's expenses such as wages, interest on debt, equipment, taxes and so forth. The Agricultural Adjustment Act of 1938 states that the parity price formula is "average prices received by farmers for agricultural commodities during the last 10 years and is designed to gradually adjust relative parity prices of specific commodities". If the parity price for a commodity is not sufficient enough for a farm operator to support his or her family and operate the business then the government could step in and support prices through direct purchases, or the issuance of non-recourse loans to farmers.

RELATED TERMS
  1. Common Stock

    A security that represents ownership in a corporation. Holders ...
  2. Conversion

    The exchange of a convertible type of asset into another type ...
  3. Conversion Price

    The price per share at which a convertible security, such as ...
  4. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  5. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  6. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
Related Articles
  1. How To Avoid Closing Options Below Intrinsic ...
    Options & Futures

    How To Avoid Closing Options Below Intrinsic ...

  2. Put-Call Parity And Arbitrage Opportunity
    Options & Futures

    Put-Call Parity And Arbitrage Opportunity

  3. Dividends, Interest Rates And Their ...
    Options & Futures

    Dividends, Interest Rates And Their ...

  4. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center