Answer-first summary for fast verification
Answer: Dividend increase to 4%, Increase T1 to six months
The chooser option becomes more valuable when the holder has more flexibility or when the eventual put is made relatively more attractive. - **A is correct**: Increasing dividends generally increases the relative value of the put versus the call, which raises chooser value. - **B is incorrect**: Lower volatility reduces option values, so it decreases the chooser value. - **C is incorrect**: In this setup, dropping the stock price to $30 reduces the overall chooser value; the gain in the put component does not offset the loss in the call component enough. - **D is correct**: Increasing the time until the choice date increases optionality, so the chooser becomes more valuable. So the correct answers are **A and D**.
Author: Manit Arora
Ultimate access to all questions.
Q-730.1. A non-dividend paying stock is currently trading at a price $35.00 when its volatility is 30.0% and the risk-free rate is 3.0%. Consider a chooser option with a strike price of $30.00 that gives the holder the right to choose (a call or put option) in three months and the chosen option, at that point in time, will have a remaining time to maturity of nine months; i.e., T1 = +0.25 years and T2 = +1.0 years. The price of this chooser is $7.710. Which of the following changes, ceteris paribus, will INCREASE the value of this chooser?
A
Dividend increase to 4%
B
Volatility decrease to 20%
C
Stock drops to $30.00
D
Increase T1 to six months
No comments yet.