What Should the Continuous Dividend Yield Be Replaced by When

question 12

Multiple Choice

What should the continuous dividend yield be replaced by when options on an exchange rate are valued using the formula for an option of a stock paying a continuous dividend yield?

• A)The domestic risk-free rate
• B)The foreign risk-free rate
• C)The foreign risk-free rate minus the domestic risk-free rate
• D)None of the above

---

Definitions:

Abstractions

The process of extracting the underlying essence or general principles of a concept, situation, or phenomenon, often by neglecting concrete details.

Physical Sciences

Branches of science that study inanimate natural objects, including astronomy, chemistry, physics, and earth sciences.

Other-Things-Constant Assumption

The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged; in Latin, ceteris paribus.

Rational Self-Interest

Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit.