What Is the ‘Put-Call Parity’ Theorem and Its Importance in Derivatives Pricing?

Put-Call Parity is a fundamental theorem in options pricing that defines the relationship between the price of a European call option, a European put option, and the underlying asset, 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 underlying asset.

Its importance lies in identifying mispriced options, which arbitrageurs can exploit to enforce fair pricing.