Which of the Following Is a Way of Extending the Black-Scholes-Merton

question 13

Multiple Choice

Which of the following is a way of extending the Black-Scholes-Merton formula to value a European call option on a stock paying a single dividend?

• A) Reduce the maturity of the option so that it equals the time of the dividend
• B) Subtract the dividend from the stock price
• C) Add the dividend to the stock price
• D) Subtract the present value of the dividend from the stock price

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Definitions:

Normal Good

A good for which demand increases as the income of consumers increase, holding other factors constant.

Inferior Good

A type of good for which demand decreases as the income of individuals increases, inverse to typical goods.

Price Range

The spread between the highest and lowest price of a commodity, security, or asset over a given period.

Demand

The desire and ability of consumers to purchase goods and services at given prices.