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

question 29

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:

Contribution Margin

The amount remaining from sales revenue after variable costs have been deducted, indicating how much contributes to covering fixed costs and generating profit.

Manufacturing Margin

The difference between the sales revenue generated from manufactured goods and the cost of goods sold (COGS), highlighting the profitability of manufacturing activities.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs and treats fixed manufacturing overhead as a period cost.

Operating Income

Income generated from regular business operations, excluding revenues and expenses from non-operating activities.