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

Abstract

The original put-call parity relations hold under the premise that the underlying security_x000D_ does not pay dividends before the expiration of the options. Similar to Hull (2003), this paper_x000D_ relaxes the non-dividend-paying assumption. The underlying security price in the original_x000D_ European-style put-call parity relation is adjusted downwards by the present value of_x000D_ 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.