The Effects of Taxation on Put-Call Parity

20 Pages Posted: 8 Oct 2009

See all articles by Karen Alpert

Karen Alpert

University of Queensland - Business School; Financial Research Network (FIRN)

Date Written: 2008-09-12

Abstract

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.

Suggested Citation

Alpert, Karen, The Effects of Taxation on Put-Call Parity (2008-09-12). Accounting & Finance, Vol. 49, Issue 3, pp. 445-464, September 2009, Available at SSRN: https://ssrn.com/abstract=1483942 or http://dx.doi.org/10.1111/j.1467-629X.2008.00291.x

Karen Alpert (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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