13. Which of the following is a true statement? A. American options always have

Question

13. Which of the following is a true statement? A. American options always have the same value as European options. B. Black-Scholes formula accurately calculates the market option prices. C. It’s optimal to early exercise an American call, if there is no dividend. D. Binomial option pricing can be used to price Amercian options. 13. Which of the following is a true statement? A. American options always have the same value as European options. B. Black-Scholes formula accurately calculates the market option prices. C. It’s optimal to early exercise an American call, if there is no dividend. D. Binomial option pricing can be used to price Amercian options.

Explanation / Answer

A. True The holder of an American option has all the rights the holder of a European option does

and even more (exercise prior to maturity). Therefore, the American option must be worth

2at least as much as the European option.

B. True

C. True. For an American option only the dividend value can negatively affect the value of the call

option. If the underlying stock pays no dividend (or no dividend is to be paid prior to expiration

of the option), a call option can never be less than parity (intrinsic value).

D. True

The Binomial options pricing model approach is widely used as it is able to handle a variety of conditions for which other models cannot easily be applied. This is largely because the BOPM is based on the description of an underlying instrument over a period of time rather than a single point. As a consequence, it is used to value American options that are exercisable at any time in a given interval

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.