Ms. Barlow notices that the stock in the table above does not pay dividends. If the stock begins to pay a dividend, how will the price of the call option be affected?
a. It will decrease.
b. It will increase.
c. It will not change.

Rachel Barlow is a recent finance graduate from Columbia University. She has accepted a position at a large investment bank but must first complete an intensive training program. Currently she is spending three months at her firm€™s Derivatives Trading Desk. To prepare for her assignment, Ms. Barlow decides to review her notes on option relationships, concentrating particularly on put-call parity. The data she will be using in her review are provided below. She also decides to assume continuous compounding.

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Option 1 Option 2 Stock price $100 $110 Strike price $100 $100 7% Interest rate 7% Dividend yield 0% 0% Time to maturity (years) 0.5 0.5 Standard deviation of stock 20% 20% Call option price $7.38 $14.84