Consider two European 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

The presence of dividends complicates the pricing of options. The three-month option could potentially be worth more than the six-month option due to the upcoming dividend payment before the expiration of the three-month option, which can decrease the stock price and thus affect the option's value. However, various factors such as interest rates, volatility, and the size of the dividend payments can influence the relative pricing, making it possible for the three-month option to be worth more in some scenarios.

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