NACVA Exam CVA Topic 6 Question 84 Discussion

Actual exam question for NACVA's CVA exam

Question #: 84
Topic #: 6

[All CVA Questions]

Fisher Black developed a technique to value American stock options using the Black- Scholes model called the pseudo-American call option model. The steps in the method are as follows EXCEPT:

ACompute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option

BFor each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option

CSelect the European option with the highest value as the value of the American option

DUsing the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.

Show Suggested Answer

Suggested Answer: C

by Judy at Apr 21, 2024, 01:52 AM

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Jennifer

1 months ago

Wow, this is like a magic trick with options. Deducting dividends, selecting the highest European option, and keeping the stock price untainted. The Black-Scholes wizardry is strong with this one.

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Jesusita

2 months ago

Aha, I see! The missing step is using the unadjusted underlying stock price in the Black-Scholes model. Gotta keep those stock prices pure, no dividends allowed!

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Louisa

13 days ago

User 3: So, we should select the European option with the highest value as the value of the American option, right?

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Pansy

14 days ago

C) Select the European option with the highest value as the value of the American option

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Harrison

16 days ago

B) For each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option

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Golda

17 days ago

A) Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option

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Keneth

18 days ago

User 2: Yeah, that's right. Gotta keep those stock prices pure, no dividends allowed!

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Luis

1 months ago

User 1: I think the missing step is using the unadjusted underlying stock price in the Black-Scholes model.

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Glendora

2 months ago

Wait, we're supposed to select the European option with the highest value as the value of the American option? That seems a bit counterintuitive, but I'll trust the Black-Scholes experts on this one.

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Kanisha

2 months ago

Hmm, I think I've got it. Deducting the dividend payments from the exercise price for each pseudo-option is the step that's not mentioned. Tricky stuff, this option valuation.

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Brandon

4 days ago

C) Select the European option with the highest value as the value of the American option

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Aliza

2 months ago

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Nada

2 months ago

A) Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option

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Glory

2 months ago

Ah, I see! So the key step missing is the adjustment of the stock price to account for future dividends. Gotta love those pesky Black-Scholes details.

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Kanisha

1 months ago

User 2: Definitely, it's all about those Black-Scholes details.

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Nettie

1 months ago

User 1: Yeah, that adjustment is crucial for valuing American stock options.

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Lazaro

2 months ago

Hmm, I see your point. But I still think C) makes more sense because it involves selecting the option with the highest value.

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Jesus

2 months ago

I disagree, I believe the correct answer is D) Using the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.

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Lazaro

2 months ago

I think the answer is C) Select the European option with the highest value as the value of the American option.

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