Why Does a Discounted Cash-Flow Approach to Options Valuation Not

question 23

Multiple Choice

Why does a discounted cash-flow approach to options valuation not work?

• A)It is impossible to estimate expected cash flows.
• B)One cannot find the appropriate interest rate for an infinitely small interval.
• C)Finding the opportunity cost of capital is impossible as the risk of options changes every time the stock price moves.
• D)The strike price of options changes.

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Definitions:

Festinger

An American social psychologist best known for Cognitive Dissonance Theory, which explains the discomfort that arises from holding two conflicting beliefs simultaneously.

Cognitive Dissonance

The psychological discomfort experienced when holding two or more conflicting beliefs, values, or attitudes, leading to changes in belief or behavior to reduce the discomfort.

Elliot Aronson

An influential psychologist known for his research on social influence, group dynamics, and the theory of cognitive dissonance.

Theory of Planned Behavior

A psychological theory that links one's beliefs and attitudes towards behaviors to their actual behavioral intentions and actions.