Asked by Beverly Chafton on Jul 04, 2024
Verified
A high dividend payout will ________ the value of a call option and ________ the value of a put option.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Dividend Payout
The portion of a company's earnings paid to shareholders as dividends, often expressed as a percentage of the company's total earnings.
Call Option
A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.
Put Option
A financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.
- Determine the elements impacting the worth of call and put options.
Verified Answer
RT
Rikki TassoThompsonJul 05, 2024
Final Answer :
C
Explanation :
A high dividend payout means that the stock price is likely to decrease, which will decrease the value of a call option (since call options give the right to buy the stock at a certain price, and a decrease in stock price is unfavorable for the holder of the call option). On the other hand, a decrease in stock price will increase the value of a put option (since put options give the right to sell the stock at a certain price, and a decrease in stock price is favorable for the holder of the put option). Therefore, a high dividend payout will decrease the value of a call option and increase the value of a put option, which is consistent with choice C.
Learning Objectives
- Determine the elements impacting the worth of call and put options.