The Effects of Taxation on Put-Call Parity
20 Pages Posted: 8 Oct 2009
Date Written: 2008-09-12
Share and option transactions are taxed differently, which means that the after-tax cash flows used to establish put-call parity will differ depending on which option is exercised. This paper derives the after-tax put-call parity relationship for European and American options with or without dividends. Using Australian data for the period July 1999 to June 2002, the after-tax put-call parity relationship explains 88.3 per cent of no-tax lower boundary violations and 78.8 per cent of no-tax upper boundary violations. The violation are larger for more thinly traded securities, providing some evidence that traders are able to profit from the tax discontinuities that affect investors in options.
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