Suppose the underlying stock pays a dividend before the expiration of options on that stock.This will
A)increase the value of a call option and increase the value of a put option.
B)decrease the value of a call option and decrease the value of a put option.
C)increase the value of a call option and decrease the value of a put option.
D)increase the value of a put option and decrease the value of a call option.

Question

Quizplus · Accepted Answer

When a stock pays a dividend, the stock price typically drops by the amount of the dividend. This decreases the value of call options (as they benefit from higher stock prices) and increases the value of put options (as they benefit from lower stock prices).

Suppose the Underlying Stock Pays a Dividend Before the Expiration