PV of Dividends in Put Call parity/Default Day count for Equity Forwards

Hi Guys,

I have two questions:

  1. Adding PV of Dividends in Put Call parity:

I’ve come accross some questions in the CFAI website topic exams that require you to decrease the price of the stock by the Present Value of Dividends (PVD) when computing the synthetic value of an asset using put call parity.

i.e. PUT CALL PARITY: C + X/(1+r)^T = P + (S - PVD)

When exactly would we know when to subtract S by the PV of dividends? And do we also need to subtract the price of the bond by the Present Value of Coupons (PVC)?

  1. Default Day Count of Forwards:

I noticed that the answers in the CFAI website topic exams used 360 as the default day count when no specific number of days were given in the problem.

i.e. No Arbitrage Price of an Equity Forward: FP = Spot Price - PVD (1+ Rf)^T/360

Just want to confirm if we should use 360 days for the default day count if nothing is given, because I remember reading that 365 days should be used for equity, fixed income, & currency forwards, while 360 days should be used for FRAs.


Whenever the stock pays dividends.

The bond is a zero-coupon bond, so there’s no question.

Anything involving LIBOR uses 360-day years.

Thanks S2000Magician! However, there was a question on the topic exams that required the use of a 360 day count for equity forwards, so im pretty confused with that.

If they give you a LIBOR or Eurobor risk-free rate in an equity forward problem, you’d have to use 360 day years. Otherwise, I’d use 365 days. If they did something else, I don’t know what to tell you.

It’s a win-win situation. If you know which one to use you can get the correct answer. If you don’t, stick to 365 days and you can still get the correct answer…

Oh! Now I get it. Thank you!!

You’re welcome.