Options & Derivatives

Put-Call Parity

A no-arbitrage relationship linking the prices of a European call, put, the underlying and cash.

C - P = S - K e^(-rT).

What makes it special: it follows purely from replication and holds regardless of volatility, drift, or the return distribution. A call plus discounted cash and a put plus the stock pay identically in every future state, so they must cost the same today.

Any pricing model must respect it, and a violation is a genuine arbitrage.

The nuance. For American options it becomes an inequality, because early exercise is possible on the put.

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Put-Call Parity Explained

The one genuine no-arbitrage relationship in options. What it says, why it must hold, and the interview questions built on it.

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