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-   -   Fully understanding dividends in put call parity (http://www.actuarialoutpost.com/actuarial_discussion_forum/showthread.php?t=329251)

vo0d0o15 01-11-2018 05:18 PM

Fully understanding dividends in put call parity
 
I keep confusing myself because of my experience trading options in the actual market.

Question 1.) In the actual US market do you collect dividends on weekly (euro) options like you do when long a monthly call?

Question 2.) In the context of MFE, is it options are priced with the assumption that the stock will lose value in the future by taking out dividends?

And this is why C-P = S - PV (divs) - K (discounted)

BartimaeusOfUruk 01-11-2018 08:15 PM

Question 2)
Outright purchase:
Buy stock now: Pay S
If it grows at the risk-free rate -> stock is worth Se^r in one year
You also would be in possession of all the dividends the stock paid out over the year

In a futures contract:
Pay for stock & receive the stock at time one
Above we saw "...the stock would be worth Se^r in one year."
BUT...
Unlike in the example above, you don't receive any dividends between time zero and time one (because you have no position in the stock until time one)
In order to insure there is no arbitrage, the price of the futures contract must reflect that the individual didn't receive those dividends. Therefore: Se^r - AV(Divs)


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