In the Black-Scholes Setting,the Prices of American Options

question 9

Multiple Choice

In the Black-Scholes setting,the prices of American options

• A)Cannot be determined because the model assumes away the human impatience that leads to early exercise of options.
• B)Cannot be determined because the model does not describe the intermediate stock prices that are required to decide on whether to exercise an option early.
• C)Cannot be determined because the model assumes a continuous-time process,whereas to determine early-exercise you need a discrete-time model.
• D)Cannot be determined in closed-form.

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Definitions:

Lender

An individual, a financial institution or another entity that provides funds to others with the expectation that the funds will be repaid, typically with interest.

Current Liability

This refers to debts or obligations that are due to be paid within one year or within the normal operating cycle of the business, whichever is longer.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or within the normal operating cycle.

Discounted Note

A type of debt instrument that is sold or redeemed for less than its face value but whose actual value matures to the full face amount at a later date.