B
BeckyBoo
Member
Question 2 of the April 2010 paper is to prove the put-call parity when dividends are paid at a constant rate.
In the non-dividend case, I would set up 2 portfolios - A, consisting of a call and a cash holding of the strike price discounted back to current time & B, consisting of a put and a share.
Therefore, in the dividend paying case, I would expect to do something similarm, but adjusting the cash amount in portfolio A in line with the amount of dividend paid between the current time and the expiry date. (In a similar way to the exam style question on page 27 of chapter 10).
However, in the examiner's alternative "solution" they do not adjust the cash amount from what would normally be used in the non-dividend paying case. Since they do not give details of this solution though, I'm unable to work out where I'm going wrong!
Any help anyone could give would be much appreciated!
Thank you
In the non-dividend case, I would set up 2 portfolios - A, consisting of a call and a cash holding of the strike price discounted back to current time & B, consisting of a put and a share.
Therefore, in the dividend paying case, I would expect to do something similarm, but adjusting the cash amount in portfolio A in line with the amount of dividend paid between the current time and the expiry date. (In a similar way to the exam style question on page 27 of chapter 10).
However, in the examiner's alternative "solution" they do not adjust the cash amount from what would normally be used in the non-dividend paying case. Since they do not give details of this solution though, I'm unable to work out where I'm going wrong!
Any help anyone could give would be much appreciated!
Thank you