What Is the “Put-Call Parity” and How Does It Relate to Arbitrage?

Put-call parity is a principle that defines the relationship between the price of a European call option, a European put option, the underlying asset's price, and a risk-free bond. It states that a portfolio of a long call and a short put should equal a long position in the underlying asset and a short position in a zero-coupon bond.

If this relationship is violated, an arbitrage opportunity exists, allowing a trader to profit by simultaneously trading the mispriced components.