Reading 70: Option Markets and Contracts- LOSl～ Q1-3 payments, expected, adjusted, exercise, name

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LOS l: Explain how cash flows on the underlying asset affect put-call parity and the lower bounds of option prices.

Q1. The lower bound on European put option prices can be adjusted for cash flows of the underlying asset by:

A)   subtracting the present value of the expected dividend payments from the exercise price.

B)   subtracting the present value of the expected dividend payments from the current asset price.

C)   adding the present value of the expected dividend payments to the current asset price.

 

Q2. The lower bound on European call option prices can be adjusted for cash flows of the underlying asset by:

A)   subtracting the present value of the expected dividend payments from the current asset price.

B)   adding the present value of the expected dividend payments to the current asset price.

C)   subtracting the present value of the expected dividend payments from the exercise price.

 

Q3. The put-call parity relation can be adjusted for dividend payments on a stock by which of the following methods?

A)   Subtract the present value of the expected dividend payments from the current stock price.

B)   Add the present value of the expected dividend payments to the exercise price.

C)   Add the present value of the expected dividend payments to the current stock price.

 

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