Question

Consider a European put option on a dividend paying stock CCC. Current stock price is $60, the exercise price is 58, the risk-free interest rate is 5% p.a., the volatility is 30% p.a., and the time to maturity is three months. Let’s assume that the CCC stock’s ex-dividend is in 2 months. Expected dividend is $0.90. (we discussed the meaning of ex-dividend day in class. Think that dividend will be paid in 2 month)

i. What is the European put option value/price now?

ii. If the company had been paying $1.25 dividend instead of $0.90, do you think the put value you found would be higher or lower? Why? (NO CALCULATION, just explanation in one-two sentences!)  

Answer 1

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.\

1. 0.17

2. if the dividend is increased then So will decrease, since it is a put option. So decreases the value of put option increases.