Question #78

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 37

Status: Unattempted

Correct Answer: A

Part of Context Group: Q77-78
Shared Context
- Barlow calculated the value of an American call option on the stock shown in Exhibit 2. Which of the following is closest to the value of this call option? A) $15.41. B) $14.84. C) $15.12.
Question
Barlow notices that the stock in Exhibit 2 does not pay dividends. If the stock starts to pay a dividend, how will the price of a put option on that stock be affected?
Answer Choices:
A. Increase
B. Decrease
C. Increase or decrease
Explanation
The put option value will increase since the payment of dividends reduces the value of the underlying, and the value of a put is negatively related to the value of the underlying.
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