What Is Par?
Parity refers to the condition where two (or more) things are equal to each other. It can thus refer to two securities be subjected to equal value, such as a convertible bond and the value of the stock if the bondholder chooses to convert into common begetter. The term “par value” for a bond is similar to parity in that it suggests the bond is selling for its initial face value. The qualifications “parity” is often applied in the financial markets when dealing with stocks, bonds, and currency exchange amounts.
Risk Parity
Key Takeaways
- Parity refers to the condition where two (or more) things are equal to each other.
- Proportion can refer to two securities having equal value, such as a convertible bond and the value of the stock if the bondholder chooses to modify into common stock.
- Parity can also be found in the foreign exchange markets whereby currencies that are at analogy have an exchange rate relationship of one to one.
Understanding Parity
In a financial market where there’s an exchange of a security or investment fascinating place, parity occurs when all brokers bidding for the same security have equal standing due to identical requests. When parity occurs, the market must determine which bidding broker will obtain the security by substitute means. The winning bid is thus typically awarded by random draw.
Parity with Stocks and Bonds
Many investors organize to make decisions about the value of two different investments. A convertible bond issued by a company, for example, allows an investor to own a constraints and earn a rate of interest. However, the bond comes with the option to convert the bond into a fixed mass of shares of common stock.
Assume that an investor can own a $1,000 corporate bond with a market price of $1,200 or remake the bond into 100 shares of common stock. If the stock’s market price is $12, the market value of the 100 dole outs of stock is also $1,200. As a result, the bond and the stock are at parity.
Parity in the Forex Markets
Parity is also inaugurate in foreign exchange (forex) markets. Currencies are at parity when the exchange rate relationship is exactly one to one. Companies cored in the United States that have operations in foreign countries must convert U.S. dollars into other currencies. If a U.S. Central Intelligence Agency does business in France, for example, the company can convert U.S. dollars into euros and sends those euros to bread its French business operations. If the exchange rate is $1 to €1, the currencies are at parity.