[FRA]Curriculum Reading 17 - Questions with problems (9 & 19) solutions

For reading 17, question 9, the solution mentions “the net pension liability increased from 3,000 to 3,020…” where do these two figures come from? i can’t find it, deduce it from anywhere in the text…

and for the same reading, question 19, the solution says that “a higher dividend yield reduces the value of the option and thus option expense.” Can someone explain how this is so?

Thanks a lot!

hey there,

so a liability is said to arise when a pension plan is said to be underfunded (i.e. obligations>plan assets). so in your case, its safe to assume that company is not making adequate contributions to its pension plan for employees. this would ideally happen if number of employees who have elected to sign up for the plan goes up and the firm is not actively contributing towards its pension plan.

to your second question, when companies pay out dividends the stock price tanks by the amount of the dividend paid out thereby keeping shareholder wealth unchanged (corporate finance). now, since an option’s (call) price movement is proportional to that of a stock, a higher dividend will tank the stock price and in turn option prices will also fall. so n short higher dividends = a fall in stock price = a fall in the price of call options of that stock.

hope this helps.