Parity price, also known as intrinsic value or fair value, is the theoretical price of a security that is justified by its underlying fundamentals. It is the price that a security would be expected to trade at if the market were perfectly efficient and all investors had access to complete and accurate information.Parity Price is used in investing as a way to determine whether a security is overvalued or undervalued relative to its intrinsic value. If the market price of a security is higher than its parity price, it may be considered overvalued, while if the market price is lower than its parity price, it may be considered undervalued.There are several different methods for calculating parity price, including the discounted cash flow (DCF) method, the dividend discount model (DDM), and the price-to-earnings (P/E) ratio. The DCF method involves estimating the future cash flows that a security is expected to generate and discounting them back to their present value using a discount rate. The DDM involves estimating the future dividends that a security is expected to pay and discounting them back to their present value using a dividend discount rate. The P/E ratio is calculated by dividing the market price of a security by its earnings per share (EPS).Parity price is not necessarily the same as the market price of a security, and it is important to keep in mind that the market price of a security can be influenced by a wide range of factors, including investor sentiment and market conditions. As a result, the market price of a security may diverge from its parity price, and it is not uncommon for securities to trade at a premium or a discount to their intrinsic value.
