A Stock Is Currently Trading at $50 $u = 1.2$ Or Fall by a Factor Of

Multiple Choice

A stock is currently trading at $50.In each month,the stock will either increase in price by a factor of $u = 1.2$ or fall by a factor of $d = 0.9$ .The risk-free rate of interest is 0.0834% per month in simple terms,i.e. ,an investment of $1 today returns $1.00834 after one period.Consider a 52-strike,three-month European put option when a dividend of $0.5 is paid at the end of each month.Assume that the company just announces a cancellation of future dividends.Ceteris paribus,by how much does the option price change on this announcement? (Assume that if the option is exercised,it is done before dividends are paid. )

A) The option price drops by $0.39
B) The option price drops by $0.69
C) The option price rises by $0.39
D) The option price rises by $0.69