Define “Put-Call Parity” and Its Role in Options Pricing Theory

Put-call parity is a fundamental principle that establishes a relationship between the price of a European call option, a European put option, the underlying asset, and a risk-free bond, all with the same strike price and expiration date. It states that a portfolio consisting of a long call and a short put is equivalent to a long forward contract on the asset.

Its role is to ensure arbitrage-free pricing; if the parity is violated, an arbitrage opportunity exists.