An American-Style Call Option with Six Months to Maturity Has

question 10

Multiple Choice

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. If the company unexpectedly announces it will pay its first-ever dividend four 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.

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Definitions:

Forward Contract

A non-standardized agreement to buy or sell an asset at a future date for a price agreed upon today.

Daily Resettlement

The process in futures trading where the gains or losses of the day are calculated, and accounts are adjusted accordingly to reflect the market value.

Forward Contract

A bespoke contract that allows two parties to trade an asset at a fixed price on a designated date in the future.

Cereal Company

A business entity that specializes in the production and marketing of cereal and grain-based food products.