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In the valuation of financial instruments, boundary conditions are limitations on the value of an option or any other instrument determined by the provisions of the instrument and by the structure and value of any underlying instrument. Relevant boundaries for an option contract include relationships among the underlying price, the intrinsic value or forward intrinsic value of the option, and the stock price. Boundary conditions are usually expressed as equations that describe minimum and maximum values of the instrument under all possible circumstances. If boundary conditions are violated in the market, a risk-free arbitrage opportunity is created. See also Put/Call Parity.
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