Question

Suppose the? S&P 500 is at 948 ?, and a? one-year European call option with a strike price of ?$560 has a negative time value. If the interest rate is 6 % ?, what can you conclude about the dividend yield of the? S&P 500? ? (Assume all dividends are paid at the end of the? year.) The dividend yield must be at least nothing ?%. ?(Round to two decimal? places.)

Answer 1

This is a deep in the money call option. It is stated that the option has a negative time value which means that the call price is below the intrinsic value. Call price is the sum of intrinsic value and time value.

Intrinsic value = 948 - 560 = 388

Call prices increase with rising interest rate and decrease with increasing dividend.So, if the dividend yield is greater than 6%, its negative impact on call price will be greater than the positive impact of interest rate and overall the call price will fall below the intrinsic value which is the case here. So, dividend yield must be more than 6%.