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24 January, 12:36

Consider an exchange-traded call option contract to buy 500 shares with a strike price of $40 and maturity in four months. Explain how the terms of the option contract change when there is a) A 10% stock dividend b) A 10% cash dividend c) A 4-for-1 stock split

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  1. 24 January, 13:48
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    The explanation of the terms of the option contract change is below

    Explanation:

    a. Every call option contract will cover more shares

    = 500 * 1.1

    = 550

    for computing the 1.1 (1 + 10%)

    The strike price will be reduced for each share to

    = 40 : 1.1

    = $36.364

    b. Cash dividend would not adjust the terms of the contract but the contract value would decrease if it is an option to call and increase if it is an option to place

    c. Each contract call option will cover more shares

    = 500 * 4

    = 2,000

    The strike price will be reduced for each share to 40 : 4

    = $10
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