How Is the Concept of ‘Arbitrage’ Relevant When Put-Call Parity Is Violated?

If the market prices of the call, put, and underlying asset do not satisfy the put-call parity equation, an arbitrage opportunity exists. Arbitrageurs can simultaneously buy and sell the mispriced instruments to lock in a risk-free profit.

This process of arbitrage buying and selling forces the prices back into alignment, ensuring the parity relationship generally holds for European options.