Value of American Calls Assignment | Homework For You

In the classroom we discussed that the value of American calls (as most traded options are in American type) will decline if the underlying stocks pay dividends, and therefore theoretically, the investors should sell an American call before dividends payment since the investors can buy it back with a lower price after dividends payment. However, in practice, it may not be a wise idea to sell your American call before the dividend payments and purchase back after the dividend payments. In other words, if you want to create a trading strategy to capture arbitrage profits by shorting a call immediately before the dividend payments and immediately closing out this short position by longing a call right after the dividend payments, there are some issues that may cause a failure of this strategy. Can you list those possible issues, there are 5 of them.Get Finance homework help today