36 Put–Call Parity and Dividends The put–call parity condition is altered when dividends are paid.

The dividend adjusted put–call parity formula is:

S ×  e −dt  + P = E ×  e −Rt  + C where d is again the continuously compounded dividend yield.

(a) What effect do you think the dividend yield will have on the price of a put option? Explain.

(b) From the previous question, what is the price of a call option with a strike price of DKr2.00 and a maturity of six months if the share has a dividend yield of 2 per cent per year? What is the price of a put option with the same strike price and time to expiration as the call option?