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Answer: b) The Black-Scholes model can be modified to incorporate dividends on European calls/puts: the stock price (S0) is reduced by the present value of all dividends during the option’s life
Dividends affect option value because they reduce the stock price expected over the option’s life. - **Calls** lose value when dividends increase. - **Puts** gain value when dividends increase. - The Black-Scholes framework can be adjusted for known dividends by using the stock price reduced by the **present value of expected dividends** during the option’s life. Therefore: - **A** is false: the model can be modified. - **B** is true. - **C** is false: higher dividends reduce call value. - **D** is false: higher dividends increase put value, not decrease it. So the correct answer is **B**.
Author: Manit Arora
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Q-179.5. In regard to the impact of DIVIDENDS on option value, which of the following is TRUE?
A
a) The Black-Scholes model cannot be modified to incorporate the impact of dividends on European call or put options
B
b) The Black-Scholes model can be modified to incorporate dividends on European calls/puts: the stock price (S0) is reduced by the present value of all dividends during the option’s life
C
c) An increase in the dividend (dividend yield) will increase the value of an American/European CALL
D
d) An increase in the dividend (dividend yield) will decrease the value of an American/European PUT
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