Consider an exchange-traded call option contract to buy 500 shares with a strike price of $50...

Consider an exchange-traded call option contract to buy 500 shares with a strike price of $50 and maturity in four months. Explain how the terms of the option contract change when there is

A 10% stock dividend
A 10% cash dividend
A 5-for-1 stock split

Expert Solution

A. When the stock dividend will be declared, the overall number of shares of the call option are going to increase in the same proportion but the price of the option will be coming down in order to adjust for the same so the overall net result will be Similar, but the number of shares will go up and the price of the option will come down to adjust for the discrepancy.

B. when the 10% of cash dividend is declared it will mean that the overall value of the option strike price is going to come down by 10% because of the decrease in the value of the underlying asset

C. When there is a five for one stock split,it will mean that the investor will be having an additional share and the overall number of shares in the option will be going up but the price of the option will be coming down in order to adjust for any kind of increase in the number of shares so net effect will remain same.

in this case the total number of share will become 600 but the overall value of the option portfolio will remain 25000(600*41.466)

jeff jeffy answered 2 years ago

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