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Option Put-Call Parity Relations When the Underlying Security Pays Dividends

Author

Listed:
  • Weiyu Guo

    (Department of Finance, University of Nebraska¬°XOmaha, U.S.A.)

  • Tie Su

    (Department of Finance, University of Miami, U.S.A.)

Abstract

The original put-call parity relations hold under the premise that the underlying security does not pay dividends before the expiration of the options. Similar to Hull (2003), this paper relaxes the non-dividend-paying assumption. The underlying security price in the original European-style put-call parity relation is adjusted downwards by the present value of expected dividends before the option expires. The upper bound of the American-style put-call parity relation is adjusted upwards by the amount of the present value of expected dividends. The results provide theoretical boundaries of options prices and expand application of put-call parity relations to all options on currencies and dividend-paying stocks and stock indices, both European-style and American-style.

Suggested Citation

  • Weiyu Guo & Tie Su, 2006. "Option Put-Call Parity Relations When the Underlying Security Pays Dividends," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 225-230, December.
  • Handle: RePEc:ijb:journl:v:5:y:2006:i:3:p:225-230
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    References listed on IDEAS

    as
    1. Cox, John C & Ross, Stephen A, 1976. "A Survey of Some New Results in Financial Option Pricing Theory," Journal of Finance, American Finance Association, vol. 31(2), pages 383-402, May.
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    Keywords

    options; dividends; put-call parity;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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