Given a Longer-Lived American Call and a Shorter-Lived American Call

question 45

Multiple Choice

Given a longer-lived American call and a shorter-lived American call with the same terms,the longer-lived call must always be worth

• A)at most the value of the shorter-lived call
• B)at least as much as the shorter-lived call
• C)exactly the same as the shorter-lived call
• D)the shorter-lived call discounted to the length of the longer-lived call
• E)none of the above

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Definitions:

Discount Rate

The interest rate used to determine the present value of future cash flows.

Capital Projects

Long-term investment projects requiring significant sums of money to acquire, improve, or maintain physical assets.

Riskless Assets

Financial instruments that are considered to have a minimal risk of loss, often exemplified by government bonds or Treasury bills.

Risky Asset

An asset that has a significant degree of uncertainty in its future returns, including the possibility of losing some or all of the original investment.