What Is the Difference Between Valuing an American and a European

question 6

Multiple Choice

What is the difference between valuing an American and a European option using a tree?

• A) The value of u is higher for American options
• B) The value of u is lower for American options
• C) The time steps for American options are not equal
• D) It is necessary to do two calculations at nodes where the option is in the money

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Definitions:

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing owners' claims on the company's resources.

Treasury Stock

Shares initially released to the public and then bought back by the corporation that issued them, diminishing the overall supply of shares on the market.

Paid-in Capital

The amount of money that a company has received from shareholders in exchange for shares of stock, above the par value of the shares.

Separate Legal Entity

An entity, such as a corporation or limited liability company, recognized by law as having rights and obligations distinct from those of its members or owners.