{"title":"Stock Option Contract Adjustments: The Case of Special Dividends","authors":"K. Barraclough, H. Stoll, R. Whaley","doi":"10.2139/SSRN.1430558","DOIUrl":null,"url":null,"abstract":"The terms of stock option contracts are adjusted in the event of unexpected corporate actions, and the nature of the adjustments may result in windfall gains or losses to open option positions. This paper evaluates the fairness of the two different procedures used for special cash dividends. We show that, while neither procedure is technically correct, the absolute adjustment used in the U.S. and Canada minimizes the windfall change in option value when the dividend is announced. In addition, the proportional adjustment used in Australia and Europe depends on stock price and is therefore vulnerable to temporary aberrations in the stock market.","PeriodicalId":40006,"journal":{"name":"Journal of Derivatives","volume":"9 1","pages":""},"PeriodicalIF":0.4000,"publicationDate":"2009-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"3","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Derivatives","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.2139/SSRN.1430558","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 3
Abstract
The terms of stock option contracts are adjusted in the event of unexpected corporate actions, and the nature of the adjustments may result in windfall gains or losses to open option positions. This paper evaluates the fairness of the two different procedures used for special cash dividends. We show that, while neither procedure is technically correct, the absolute adjustment used in the U.S. and Canada minimizes the windfall change in option value when the dividend is announced. In addition, the proportional adjustment used in Australia and Europe depends on stock price and is therefore vulnerable to temporary aberrations in the stock market.
期刊介绍：
The Journal of Derivatives (JOD) is the leading analytical journal on derivatives, providing detailed analyses of theoretical models and how they are used in practice. JOD gives you results-oriented analysis and provides full treatment of mathematical and statistical information on derivatives products and techniques. JOD includes articles about: •The latest valuation and hedging models for derivative instruments and securities •New tools and models for financial risk management •How to apply academic derivatives theory and research to real-world problems •Illustration and rigorous analysis of key innovations in derivative securities and derivative markets
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