Explain the put-call parity relation is equivalent

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The argument used to explain the put-call parity relation is equivalent to saying that if the relation is not satisfied, then an arbitrage opportunity exists. Make this transparent by putting yourself in the position of an arbitrage trader: explain how you would make a risk-free profit when the put-call parity is not satisfied. Please explain your trading strategy clearly, i.e. state what to trade and when to make the trades. Make all the standard assumptions such as there are no commission fees, you can borrow money from an ideal bank and can always short-sell the asset. Also explain why when you keep making money, the put-call parity will be satisfied, and there is no more arbitrary opportunity anymore.

Reference no: EM132282791

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