what is parity price 
parity price refers to a price level that sets two assets or securities equal in value to one another it is a concept that is used in several markets including fixed income equities commodities and convertible bonds for convertible bonds the parity price concept is used to determine when it is financially beneficial to convert a bond into shares of common stock if two assets are trading at parity it can be inferred they are at the same price or value understanding parity priceinvestors often have to make decisions about the relative value of two different investments parity is a term used to describe when two things are equivalent to one another thus it can be used to refer to two securities having equal value such as a convertible bond and the value of a stock if the bondholder chooses to convert a convertible bond into common stock in addition to using parity price for a convertible security investors can use it to make investment decisions about commodities and currencies parity price can help determine the value of stock options because parity is defined as the price at which an option is trading at its intrinsic value in addition the concept of parity is also used to compare the value of two currencies purchasing power parity ppp purchasing power parity ppp is a method of comparing the purchasing power between countries ppp compares the cost of a basket of goods in one country with the cost of the same goods in another country however purchasing power parity adjusts for the exchange rates between the two countries in other words purchasing power parity adjusts two similar products should be the same price in both countries after figuring for exchange rates factoring in commoditiesfor agricultural commodities the parity price is the purchasing power of a particular commodity relative to a farmer s expenses such as wages loan interest and equipment the agricultural adjustment act of 1938 defines parity price as the average price received by farmers for agricultural commodities during the previous 10 years if the parity price for a commodity is below the current market price the government may provide price support through direct purchases parity in the forex marketsparity is also found in foreign exchange forex markets the exchange rate relationship between two currencies is exactly one to one companies based in the united states that have operations in foreign countries must convert u s dollars into other currencies if a u s firm does business in france for example the company can convert u s dollars into euros and send those euros to fund its french business operations if the exchange rate is 1 to 1 the currencies are at parity on july 12 2022 the euro reached parity with the u s dollar for the first time in 20 years eur usd was 1 00 as the euro fell to its lowest level against the u s dollar since 2002 interest rate parity irp is the fundamental equation that governs the relationship between interest rates and currency exchange rates the basic premise of interest rate parity is that hedged returns from investing in different currencies should be the same regardless of their interest rates that means if we consider two countries and interest rates go up in one of them then the exchange rate of their currencies will also have to adjust in a commensurate manner forex traders use the concept of interest rate parity to identify arbitrage and other trading opportunities the formula for irp is f 0 s 0 1 i c 1 i b where f 0 forward rate s 0 spot rate i c interest rate in country c i b interest rate in country b begin aligned f 0 s 0 times left frac 1 i c 1 i b right textbf where f 0 text forward rate s 0 text spot rate i c text interest rate in country c i b text interest rate in country b end aligned f0 s0 1 ib 1 ic where f0 forward rates0 spot rateic interest rate in country cib interest rate in country b parity price how convertible bonds workthe conversion parity price on a convertible security refers to the break even price on a convertible securitya convertible bond offers bond investors the opportunity to convert said bond into a fixed number of shares of common stock at a specific price per share investors purchase convertible bonds because the owner can earn interest on a fixed income investment and they have the option of converting into the company s equity parity price is the market price of the convertible security divided by the conversion ratio the number of common stock shares received upon conversion assume for example that a 1 000 ibm convertible bond has a market price of 1 200 and the bond is convertible into 20 shares of ibm common stock the parity price is if the market price of ibm common stock is above 60 per share the investor can profit by converting it into common stock parity in options trading