If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Question

Quizplus · Accepted Answer

Put-call parity is a fundamental principle in options pricing that relates the prices of put and call options on the same stock. If the actual put option premium is less than what is suggested by the put-call parity relationship, an arbitrage opportunity arises. This is because an investor can exploit the price difference between the actual put option premium and the theoretical price predicted by put-call parity by purchasing the cheaper put option and simultaneously selling the more expensive call option. The investor can then earn a risk-free profit from the difference in premiums.

If an Actual Put Option Premium Is Less Than What