CFA II stock pension related question

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could anyone please answer my questions:

1 please explain why higher dividend yield could decrease the estimated fair value of stock option?
2 why higher risk free rate could increase the estimated fair value of stock option?

thanks

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关键词：question PENSION Related Stock CFA I CFA Stock question PENSION Related

Hi, Snupy123

Regarding to your questions,
1) if it's a call option, the option value = Max( S-X,0),
where, S is spot price of underlying stock
            X is exercise price of option.
If Dividend is higher,  S will be lower (stock price adjust for dividend）,decrease option value
Example: S=100,X=80, option value =100-80=20 when exercise, if pay dividend 2, S will be=98,option=98-80=18, lower.

Put option is opposite; usually employer is compensated with call option

2) Risk free rate, call put parity is  C+X/ert=P+S, C=P+S-X/(ert)
r=risk free rate, P=put option, C=call option,
R higher, X(ert) lower, cause C is higher.

It's ok if you can't understood option value now, Please skip this part when you read financial analysis. you will meet option pricing mode in Session 17.

Let me know if any queries.