Consider two identical European call options on two identical stocks A and B,except that the former stock pays dividends and the latter stock does not.Which of the following statements is most valid?
A)Call A is greater in value than call B .
B)The time value of call A is greater than that of call b .
C)The time value of call B is greater than that of call A .
D)The insurance value of call B is greater than that of call A .

Question

Quizplus · Accepted Answer

The time value of call B is greater than that of call A because dividends decrease the price of stock A, making it less valuable to hold an option on it compared to stock B, which does not pay dividends. This affects the time value, as the option on the non-dividend-paying stock (B) is more valuable over time.

Consider Two Identical European Call Options on Two Identical Stocks