It can be shown that the put-call parity relationship for options where the underlying asset makes cash distributions and where the time value of money is recognized is: Put option price - Call option price = ________.

Question

Quizplus · Accepted Answer

The put-call parity formula for options with cash distributions and time value of money is: Put option price - Call option price = Present value of strike price + Present value of cash distribution - Price of underlying asset. This is because the cash distribution has a present value component that must be factored in. The put-call parity formula takes this into account, as well as the time value of money and the price of the underlying asset. Option A, B, and D are incorrect because they do not properly account for the present value of the cash distribution.

It Can Be Shown That the Put-Call Parity Relationship for Options