Which of the following is a way of extending the Black-Scholes-Merton formula to value a European call option on a stock paying a single dividend?
A) Reduce the maturity of the option so that it equals the time of the dividend
B) Subtract the dividend from the stock price
C) Add the dividend to the stock price
D) Subtract the present value of the dividend from the stock price

Question

Quizplus · Accepted Answer

To value a European option we replace the stock price by the stock price minus the present value of all dividends that have ex-dividend dates during the life of the option.

Which of the Following Is a Way of Extending the Black-Scholes-Merton