The put-call parity relation can be adjusted for dividend payments on a stock by which of the following methods? A) Add the present value of the expected dividend payments to the exercise price. B) Add the present value of the expected dividend payments to the current stock price. C) Subtract the present value of the expected dividend payments from the current stock price. Solution: C. The correct adjustment is to subtract the present value of the expected dividend payments from the current stock price. Can someone please explain this concept
Options prices do not adjust for stock dividends.
The put-call parity holds also for options on dividend paying stocks. Theoretically both answers A) and C) would be correct, except for one important detail. In A) you would have to add present value of the dividend to the PRESENT VALUE of the strike price. Hence only C is correct. What is the logic behind? A position in stock and put must equal a position in zero coupon bond and call. Since zero coupon bond pays no dividend, it would not be directly comparable to the stock price on the other side of the equation. The assumption behind is of course that we are able to calculate the PV of the dividend.
Thanks mihau !!!