
Explanation:
Only the put option on Green Company will be adjusted for the stock split. This is because options are typically adjusted for events that change the number of shares in circulation, such as stock splits or stock dividends. In the case of Green Company, the 4-for-3 stock split will increase the number of shares, which will necessitate an adjustment of the put option held by Harry Wilson. This adjustment is necessary to maintain the economic equivalence of the option contract before and after the stock split. It ensures that the holder of the option is not disadvantaged by the increase in the number of shares. The adjustment usually involves changing the strike price and the number of shares that each contract represents.
Choice A is incorrect. While it's true that dividends can impact the price of an option, standard exchange-traded options are not adjusted for regular cash dividends. This is because the declaration of a dividend is usually factored into the option's price prior to its announcement.
Choice C is incorrect. As explained above, standard exchange-traded options are not adjusted for regular cash dividends. Therefore, the call option on Blue Company will not be adjusted for the cash dividend. Similarly, while stock splits do result in adjustments to options contracts, they only affect the specific company's options where split has happened and not all companies' options in general.
Choice D is incorrect. This statement contradicts how stock splits affect options contracts. In case of a 4-for-3 stock split announced by Green Company, there will indeed be an adjustment to Harry Wilson's put option on Green Company shares.
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Q.743 Harry Wilson owns a call option on the shares of Blue Company and a put option on the shares of Green Company. Both companies belong to the booming communication sector of Holland. The sector has been growing at a rate of 7% for the last 5 years. Blue Company recently announced a cash dividend of $1.20 on its stock while Green Company announced a 4-for-3 stock split. Which of the following impacts on the options is accurate?
A
Only the call option on Blue Company will be adjusted for the cash dividend.
B
Only the put option on Green Company will be adjusted for the stock split.
C
Options on both of these companies will be adjusted for the cash dividend and the stock split.
D
None of the companies’ options will be adjusted.