Question

#14

A call option on 100 shares of Generous Dynamics stock has an exercise price $130.0 per share. GD declares a stock dividend of 20.0 percent. What happens to the exercise price and the number of shares underlying the option? Nothing happens Number of shares increases to 120.0 and the exerçise price is reduced to 108.33 Number of shares increases to 120.0 and the exercise price remains the same Number of shares increases to 120.0 and the exercise price is reduced to 104.0 stystaring pok.com is staringar som

Answer 1

The answer is D

When the Dividend is Announced the price of call option is reduced by that amount of dividend because of the fall in the value of underlying stock and the number of shares gets increased by that percentage.

So, In this question the price of exercise option will be $130*(1-0.2) = $104

and, the number of shares will go up by100*1.2 = 120.