109 Sept 2000 Q1(iii)

I have written down a slightly different answer to that put in the CMP notes for (ii), by setting up a different portfolio to the answer given. I have attached this as an image.

So I was wondering how I could adapt the answer you have given to (iii) in the CMP notes?
It would really be good if there is an answer which is basically a reproduction of the way the notes answer this in Chap 10, pages 28-29, but just in the context of the portfolio I have set up...

 

Just realised the attached image does not show up clearly, so I have attached a version2 here.

 

Hi,

Your solution in the attachment is fine.

As the dividend means that the portfolio with the share (and the put) is now worth more than the other portfolio (with the call and the cash), you can either:

(i) deduct the present value of the dividend from the portfolio with the share and put, or:

(ii) add the the present value of the dividend to the portfolio with the call and the cash.

It doesn't matter which you do (as long as you do it correctly!)