Put-call parity demonstrates that the cash flows derived from holding a European put option on a share that does not pay dividends can be replicated by a combination of purchasing the share,borrowing at the risk-free rate and selling the counterpart call.

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Put-call parity is a fundamental principle in options pricing that shows the relationship between the prices of European put and call options with the same underlying asset, strike price, and expiration date. It states that the price of a European put option minus the discounted value of its exercise price is equal to the price of a European call option minus the price of the underlying asset. This relationship can be used to create a portfolio that replicates the cash flows of a European put option by buying the underlying asset, borrowing at the risk-free rate, and selling a call option with the same strike price and expiration date. This portfolio is known as a synthetic long put and has the same cash flows as owning a European put option. However, this only holds true for shares that do not pay dividends, as the payment of dividends can affect the price of the underlying asset and the option itself.

Put-Call Parity Demonstrates That the Cash Flows Derived from Holding