Suppose That the Domestic Risk Free Rate Is R and Dividend

question 18

Multiple Choice

Suppose that the domestic risk free rate is r and dividend yield on an index is q.How should the put-call parity formula for options on a non-dividend-paying stock be changed to provide a put-call parity formula for options on a stock index? Assume the options last T years.

• A) The stock price is replaced by the value of the index multiplied by exp(qT)
• B) The stock price is replaced by the value of the index multiplied by exp(rT)
• C) The stock price is replaced by the value of the index multiplied by exp(-qT)
• D) The stock price is replaced by the value of the index multiplied by exp(-rT)

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Definitions:

Corporate Stock

Share in a corporation. The stockholders own the corporation.

Depository Institutions

Financial institutions that accept deposits from the public, including banks, savings and loan associations, and credit unions, providing various banking and lending services.

Deposits

Funds placed into banking institutions for safekeeping, which can include savings accounts, checking accounts, and certificates of deposit.

Reserves

Funds or materials set aside for future use or to cover unexpected emergencies; in banking, refers to the amount of money banks are required to hold as a safety measure.