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

  • Weiyu Guo

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

  • Tie Su

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

Registered author(s):

    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.

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    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 5 (2006)
    Issue (Month): 3 (December)
    Pages: 225-230

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    Handle: RePEc:ijb:journl:v:5:y:2006:i:3:p:225-230
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    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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