How Does a Dividend Payment Affect the Put-Call Parity Relationship?
A dividend payment complicates the Put-Call Parity relationship because it reduces the stock price on the ex-dividend date, affecting the terminal payoff. To adjust the parity formula, the present value of all expected future dividends must be subtracted from the current stock price.
The adjusted formula then maintains the no-arbitrage relationship between the four components.
Glossar
Put-Call Parity
Relationship ⎊ Put-call parity describes a fundamental relationship between the price of a European call option, a European put option, and the underlying asset price, assuming they share the same strike price and expiration date.
Parity
Equivalence ⎊ ⎊ Parity, within financial markets, fundamentally represents a state of equality between two or more assets, rates, or pricing models, often serving as a benchmark for arbitrage opportunities or risk-neutral valuation.
Payment
Settlement ⎊ Payment within cryptocurrency, options trading, and financial derivatives represents the actual transfer of value, typically digital assets or fiat currency, to fulfill contractual obligations arising from a trade or contract execution.
Put-Call Parity Relationship
Equilibrium ⎊ The put-call parity relationship, fundamentally, establishes a theoretical equilibrium between the prices of European put and call options with identical strike prices and expiration dates, alongside the underlying cryptocurrency asset.