A European Option on a Stock with Known Dollar Dividend

question 12

Multiple Choice

A European option on a stock with known dollar dividend is valued by setting the stock price variable equal to the stock price minus the present value of the dividend in the Black-Scholes-Merton formula. A second price can be obtained using the tree building procedure in the chapter. Which of the following is true when a very large number of time steps are used in the tree?

• A) The first price is higher than the second price
• B) The first price is lower than the second price
• C) The first price is sometimes higher and sometimes lower than the second price
• D) The two prices are almost exactly the same

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Definitions:

Travellers' Cheques

Preprinted, fixed-amount cheques used by travellers to safely carry and spend money abroad.

Canadian Dollar

The official currency of Canada, often symbolized as CAD or denoted by the dollar sign '$' with a distinguishing C to indicate Canadian currency.

All-Inclusive Package

A package deal, often offered by resorts and tour operators, that includes all related costs like accommodation, meals, and services in one price.

Travel Agent

A professional who arranges travel plans and accommodations for clients.