What Does Parity Price Mean?
The Parity Price is the cost for a given commodity that is tied to a historical price or composite price.When the price of an asset is directly linked to another price.The term “parity” refers to equality. 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.
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.