Pension question: Why does a higher Dividend Yield reduce the value of a call option?

CFA Level II
#1

I’m looking at the Pension vignette Q 13 - 18 CFAI I’m confused: Why does a higher dividend yield reduce the value of employee options?

#2

because dividends reduce the cash in the company, which reduces equity, which reduces the value of a stock so your options would be worth less.

#3

Remember basic options pricing. Cash dividends reduce call premiums (value of the option to the employee) as the stock is expected to drop in price on the ex-div date by the amount of the dividend.

#4

Because there is a foregone opportunity in holding an option rather than owning the stock. Think of the futures/forwards as well as option pricing with cash flows from derivatives

#5

you need to remove pv of cash flows from the price of the underlying and use this adjusted cash flow to calc value. I like to think also of the equity forward value calc of V = s - PVD - Pv of Fwd price to help me remember effect of cash flows. Also, note this is not a pension question; it is the last part of the reading dealing with option comp, not pensions.

#6

what is the page number and CFA! book number where the question came from

#7

by the way in practise, when a company declares dividend, the strike price of the options also moves down with it. os effectively dividends should have 0 impact on options.

#8

Thanks for all the awesome responses. Audrey, I wrote down the vignettes into a spreadsheet so I can study them faster, so I don’t have the actual question # in front of me, sorry