Question: When a company undertakes a corporate finance event such as a merger or a stock dividend, the options exchange will make contract adjustments to the calls and puts that are traded on the company's stock. The exchange's goal is to alter the option contracts to make it fair for both the traders who are long and the traders who are short. For each event listed below, describe the necessary adjustments to the option contract. The size of one option contract is 100 shares of stock.
(a) Aegean Corporation decides to pay a 4% stock dividend. How should an option on Aegean stock be adjusted?
(b) KVH Industries is acquired by Verizon Holdings. For each share of KVH stock, Verizon pays $5.25 in cash plus one-fifth of a share of Verizon stock. How should an option on KVH stock be adjusted?