Why Does the Black-Scholes Call Formula Use the Present Value

question 14

Multiple Choice

Why does the Black-Scholes call formula use the present value of the exercise price and not merely the exercise price in the formula?

• A)All finance must use the time value of money.
• B)Call options are rarely exercised early.
• C)The present value accounts for a potential dividend.
• D)The put option uses the future value.

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Definitions:

Profit-Maximizing

A strategic approach in which a firm determines the best output level and pricing to achieve the highest possible profit.

Competitive Market

A market structure characterized by a large number of buyers and sellers, where no single entity has a significant influence on the market price.

Long-Run Equilibria

A state in economics where all factors of production and costs are variable, and firms make decisions to maximize profits without any fixed inputs.

Demand Increases

A situation in which the desire and ability of consumers to purchase a good or service grow, typically leading to higher prices and potentially greater supply.