**A**: Anything that affects the underlying price at expiration will affect the price of the option. use S0 - PV(CF, 0, T) in the Black-Scholes-Merton model instead of S0 to adjust for cash flows of the underlying.

- The $3 dividend PV = $3*e^( -9%*(90/365)) = $2.93. In Excel, this can be done with EXP() function.
- The adjusted stock price = $102 - $2.93 = $99.07
- Apply the Black-Scholes-Merton model

BSM Call Put Adjusted for dividends 8.91 6.21 Unadjusted 10.74 5.11

- The difference in prices is substantial, amounting to almost 20%.

*Bonus Points*

- Adjusting the stock price reduces the value of the call and increases the value of the put.

*Category: C++ Quant > Derivatives > Valuation*

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