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

Weiyu Guo

Department of Finance, University of Nebraska—Omaha, U.S.A.

Tie Su

Department of Finance, University of Miami, U.S.A.

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

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