Question: Question 3 (40 points) Q3 (40 points) Consider a stock that pays no dividends. In the absence of arbitrage, a European call option and a

Question 3 (40 points) Q3 (40 points) Consider a stock that pays no dividends. In the absence of arbitrage, a European call option and a European put option on the stock with the same strike price and the same expiration date 7 conform to the put-dall parity relation. The relation may be written in convenient form as So + Po = Co + PV(X). By contrast, consider a stock that pays a dividend D at time T, as well as a European call option and a European put option on the stock with same strike price, both expiring at time T. In the absence of arbitrage, a modified version of the put-call parity relation must hold. That modified version is: So + Po - Co + PV (X + D) So+ Po = Co + PV(X) + D So + Pot PV ( D) - Co + PV(X) So + Po -D = Co +PV(X) So + Po + D = Co + PV(X)

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