## Testing for put/call parity

Now let's check the prices from the ocaml Monte-Carlo pricer against the most obvious arbitrage relationship

Put call parity is an important relationship in options pricing. Let's test our prices to see if they obey this relationship.

To do so I add a simple helper function to payoff.ml to get the npv of some future cash:

``````(* get the net present value of some amount *)
let npv ~amt ~rate ~time = amt *. exp(-1.0 *. rate *. time);;
``````

...and the tests themselves. Note that the put/call parity relationship for digitals is slightly different:

``````let assert_nearly ?(tolerance = 0.001) label a b =
Printf.printf "Test %s - a: %f b: %f\n" label a b;
assert( abs_float(a-.b) <tolerance );;

let spot = 1.613 in
let expiry = 0.25 in
let r = 0.055 in
let strike = 1.600 in
let discount x = Payoff.npv ~rate:r ~time:expiry ~amt:x in
let mc payoff =
Mc1c.sim
~payoff:payoff
~expiry:expiry
~spot:spot
~vol:0.35
~r:r
~num_paths:100000 in
let price payoff = mc (payoff ~strike:strike) in
assert_nearly
"Put call parity"
((price Payoff.call) +. (discount strike))
((price Payoff.put) +. spot);
assert_nearly
~tolerance:0.01
"Digital put/digital call parity"
((price Payoff.digital_put) +. (price Payoff.digital_call))
(discount 1.0)
;;
``````

Here's the output:

``````Test Put call parity - a: 1.707748 b: 1.708199
Test Digital put/digital call parity - a: 0.982665 b: 0.986344
``````

Trebles all round! The prices are ok. It's also interesting that ocaml is actually even faster than I thought. I was running bytecode and if you use ocamlopt to create native code my examples run about five times faster.