Valuation of Contingent Claims

CFA Level II Derivatives
#1

Hi Dear,

There is a question raising here:

Compared to the value of a call option on a stock with no dividends, a call option on an identical stock expected to pay a dividend during the term of the option will have a:

lower value in all cases

higher value only if it is an American style option.

lower value only if it is an American style option.

The correct answer is lower value in all cases. I wondering if the call option will be higher value if its an American style option?

Thanks.

#2

You just answered your own question. If the call value is lower in all cases, then it will be lower regardless of whether it’s American, Euro, or Bermuda style.

#3

Both kind of Call options are worth less if stock dividend is expected before an option expiration but AO Call might be worth more than EO Call in such case because can be early executed before dividend payment while EO Call cannot.