FRM Glossary · Part I · Markets

Put–Call Parity

The arbitrage identity relating European calls, puts, the underlying, and a risk-free bond: C − P = S − K·e^(−rT).

In more detail

Put–call parity says a fiduciary call (long call + risk-free bond striking K) must equal a protective put (long stock + long put striking K). Arbitrageurs exploit any deviation. Parity breaks down with dividends, American-style features, or borrowing/lending frictions.