Question

Lucy, an employee at a document shredding agency, came across information that indicates that GE will likely miss its next dividend payment. How can Lucy profit from this information using options? If Lucy is able to profit from this information, what type of market efficiency is the market exhibiting?

Answer 1

A)

Through buying call options

Dividends likely to push stock prices down since Lucy has found that dividend will be missed this will act as a material information and unexpectedly price may go. In this case Lucy can buy a CALL option of Stock GE so that when price move up value of call option moves up.

B)

Semi-strong form of market efficiency

Semi-strong form efficiency contends that security prices have factored in publicly-available market and that price changes to new equilibrium levels are reflections of that information. It is considered the most practical of all EMH hypotheses.

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