If the stock pays a specific dollar dividend and the stock price,to include the dividend,follows the binomial up and down factors,which of the following will happen?
A)the binomial tree will recombine
B)the binomial tree will not recombine
C)the option will be mispriced
D)an arbitrage profit will not be possible
E)none of the above

Question

Quizplus · Accepted Answer

When a stock pays a specific dollar dividend, the binomial tree will not recombine because the dividend payment causes a shift in the stock price path, preventing the tree from having the same stock price at different nodes.

If the Stock Pays a Specific Dollar Dividend and the Stock