Asked by Ashley Bull Calf on May 16, 2024
Verified
An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that
A) the call price would increase.
B) the call price would decrease.
C) the call price would not change.
D) the put price would decrease.
E) the put price would not change.
Call Premium
The amount above the par value that a call option buyer pays to have the right, but not the obligation, to purchase a particular asset at a specified price within a certain period.
Unexpectedly Announces
Refers to a situation where a company or organization makes a sudden and unforeseen public statement or disclosure, often impacting its stock price or stakeholder perceptions.
Dividend
A rephrased definition: A portion of a company's earnings that is distributed to its shareholders on a regular basis.
- Explain the impact of dividends on options pricing.
Verified Answer
MM
Morgan MauroMay 17, 2024
Final Answer :
B
Explanation :
DWhen a company announces it will pay dividends, the stock price typically decreases by the dividend amount on the ex-dividend date, making the call option less valuable (hence, the call price would decrease). Conversely, this scenario makes put options more valuable, as the decrease in stock price can benefit the put option holder (hence, the put price would decrease is incorrect; it should increase, but this option is not provided, making D the closest relevant choice given the options presented).
Learning Objectives
- Explain the impact of dividends on options pricing.