A European Option on a Stock with a Known Dollar

question 4

Multiple Choice

A European option on a stock with a 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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