Consider a call option on a stock that pays dividends at the rate $q 0$ .Which of the following statements is most valid for the Black-Scholes model?
A)The call is worth more than a call on an equivalent stock that pays no dividends.
B)The probably of the option finishing up in the money is greater than that of a call on an equivalent stock that pays no dividends.
C)The time value of the call is greater than that of a call on an equivalent stock that pays no dividends.
D)None of the above.

Question

Consider a call option on a stock that pays dividends at the rate $q > 0$ .Which of the following statements is most valid for the Black-Scholes model?
A)The call is worth more than a call on an equivalent stock that pays no dividends.
B)The probably of the option finishing up in the money is greater than that of a call on an equivalent stock that pays no dividends.
C)The time value of the call is greater than that of a call on an equivalent stock that pays no dividends.
D)None of the above.

Quizplus · Accepted Answer

In the Black-Scholes model, dividends reduce the price of a call option because the stock price is expected to drop by the dividend amount on the ex-dividend date. Therefore, a call on a stock that pays dividends is worth less, not more, than a call on an equivalent stock that pays no dividends, making options A and C incorrect. Additionally, the probability of finishing in the money is not directly affected by dividends in the way option B suggests, as this probability also depends on other factors like volatility and time to expiration.

Consider a Call Option on a Stock That Pays Dividends q>0q > 0q>0

Consider a Call Option on a Stock That Pays Dividends $q > 0$