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FRM Part I · FRM Exam Part I · Properties of Options

Compared with an otherwise identical option on a stock expected to pay no dividends, an American call on a stock expected to pay a large dividend before expiry is most likely to:

The call is worth less, since an expected dividend reduces the stock price on the ex-dividend date, which hurts call holders. Early exercise may then be optimal just before that date, but dividends do not increase call value.

  1. ABe worth less because early exercise just before the ex-dividend date may become optimalCorrect
  2. BBe worth more because dividends raise the stock price
  3. CNever be exercised early under any circumstances
  4. DHave the same value because dividends do not affect calls

Explanation

Expected dividends lower the stock price on the ex-date, reducing call value. Early exercise of an American call may be optimal just before the ex-dividend date, but dividends do not raise call value.

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