If the stock makes a dividend payment before the expiration date, then the put-call parity relation is
A)Value of call = value of put + share price − present value (PV)of dividend − PV of exercise price.
B)Value of call = value of put − share price + PV of dividend − PV of exercise price.
C)Value of call = value of put + share price + PV of dividend + PV of exercise price.
D)Value of call = value of put + share price + PV of dividend − PV of exercise price.

Question

Quizplus · Accepted Answer

The correct put-call parity relation, accounting for dividends, is: Value of call = value of put + share price - present value (PV) of dividend - PV of exercise price. This accounts for the fact that owning a call option does not entitle the holder to dividends paid during the option's life, hence the need to subtract the PV of dividends from the equation.

If the Stock Makes a Dividend Payment Before the Expiration