I don’t get this at all. Any explanations? 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 current stock price. B) Subtract the present value of the expected dividend payments from the exercise price. C) Add the present value of the expected dividend payments to the exercise price. D) Subtract the present value of the expected dividend payments from the current stock price. The correct answer was D) Subtract the present value of the expected dividend payments from the current stock price.
Put call parity assumes the security is non dividend paying. Because we don’t consider the value of dividends in exercising the option at different periods of time (i.e. you ‘give up’ dividends with early exercise). Subtracting the dividend payments gives the ‘raw’ price of the stock as if it doesn’t pay a dividend. Then you can use the same put call relation with the adjusted stock price.