(i) State what is meant by put-call parity.

(ii) By constructing two portfolios with identical payoffs at the exercise date of the options, derive an expression for the put-call parity of a European option that has a dividend payable prior to the exercise date.

1. If the equality in (ii) does not hold, explain how an arbitrageur can make a riskless profit.

c)

What can we say about the lambda of a long futures position in a dividend-paying share?