Consider two American call options,with maturities three months and six months on the same stock and same strike price.The stock pays dividends in two months time and every quarter thereafter.Which of the following statements is most accurate?
A)The three-month option must be worth more than the six-month option.
B)The three-month option must be worth less than the six-month option.
C)The three-month option must be worth less than the six-month option if the dividend payments remain constant.
D)The three-month option may be worth more than the six-month option.

Question

Quizplus · Accepted Answer

These are American options,and therefore,the six-month option can always be exercised at the same time as the three-month option,and will always be worth as much if not more than the shorter-maturity option.

Consider Two American Call Options,with Maturities Three Months and Six