Question

Which of the following statements is not correct?

a. The price of an American call on a non-dividend paying stock cannot be less than the difference between the current stock price and the present value of the exercise price.

b. The put-call parity holds for dividend-paying stocks.

c. The shareholders' position can be considered as a long call on the value of the firm.

d. The creditors' position can be considered as the face amount of debt and a long put on the value of the firm.

Answer 1

Put call parity is formulated after assumption that dividend is not paid on to the stock.the original put call parity formula will be determined basedbased upon the assumption that the underlying security will not be paying any kind of dividend before the maturity so put call parity does not hold for dividend paying stocks.

Rest of the options are completely correct because they are stating correct facts.

Correct answer option (B) Put Call Parity holds for dividend paying stocks.