Answer: lower the number of stocks to buy for calls and raise the number of stocks to short sell for puts.

## Explanation When the dividend yield increases, it affects option deltas as follows: **For Call Options:** - Higher dividend yield decreases call option delta (N(d₁) decreases) - The arbitrageur should **lower the number of stocks to buy** for call options - This is because the call option becomes less sensitive to stock price movements **For Put Options:** - Higher dividend yield increases put option delta (N(-d₁) becomes more negative) - The arbitrageur should **raise the number of stocks to short sell** for put options - This is because the put option becomes more sensitive to stock price movements **Mathematical Basis:** - In the BSM model with dividends, d₁ = [ln(S/X) + (r - q + σ²/2)T] / (σ√T) - Higher dividend yield (q) decreases d₁, which decreases N(d₁) for calls and makes N(-d₁) more negative for puts **Hedging Strategy:** - For delta-neutral hedging, the arbitrageur adjusts stock positions based on option deltas - Lower delta for calls → buy fewer stocks - More negative delta for puts → short sell more stocks Therefore, the correct action is to **lower stocks for calls and raise short selling for puts**.

Author: LeetQuiz Editorial Team