Explain the concept of Put-Call Parity.

Explain the concept of Put-Call Parity.

Approach: Define the relationship between the price of European puts and calls.

A fundamental principle in options pricing stating that the price of a European call and put with the same strike and expiration are related by the formula: C - P = S - K * e^(-rt). If this relationship is violated, an arbitrage opportunity exists.

Follow-up: How do dividends affect Put-Call Parity?

Key concepts: arbitrage, strike price, risk-free rate.