Explain carefully why Blacks approach to evaluating an American call option on a dividend-paying stock may give an approximate answer even when only one dividend is anticipated. Does the answer given by Blacks approach understate or overstate the true option value? Explain your answer.
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Explain carefully why Blacks approach to evaluating an American call option on a dividend-paying stock may give an approximate answer even when only one dividend is anticipated. Does the answer given by Blacks approach understate or overstate the true option value? Explain your answer.
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- Is the Black-Scholes-Merton options pricing model well suited to pricing an American call option on a dividend paying stock?Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock.Which of the following is true, select the most appropriate answer below? There is always some chance that an American call option on a stock will be exercised early when no dividends are expected An American call option on a stock should never be exercised early An American call option on a stock should never be exercised early when no dividends are expected There is always some chance that an American call option on a stock will be exercised early
- Which of the following statement(s) is(are) TRUE? (i) The valuation price of a stock primarily depends on expected future dividends to its shareholders and its required rate of return. (ii) An investor who intends to sell a stock after holding it for a short period will forgo all future dividends, thus will be willing to pay for a lower price for the stock compared to another investor who prefers to hold the share for a longer period. (iii) The valuation share price is positively related to the share's required rate of return.Which of the following statements is correct? As the volatility of the stock price increases (all else remaining unchanged), both European calls and puts become less valuable. The seller of an option can choose whether to post a margin or not. Consider a call and a put which are both written on the same asset, and have the same strike price and the same time-to-maturity. It is possible for the call and the put to be out-of-the-money at the same time. The intrinsic value of a European option is the value it would have if the time-to-maturity was zero. Please explain and justify your choice using your own words.Select all that are true with respect to option valuation: Group of answer choices The holder of a call option has rights to the dividend on the underlying stock. The holder of a put option has rights to the dividend on the underlying stock. A call option on a dividend paying stock would be worth less than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend). A call option on a dividend paying stock would be worth more than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend).
- The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases. Select one: True FalseA company announces a major expansion which causes the price of its stock to increase and also causes an increase in the standard deviation (or volatility) of stock returns. How will these two market reactions affect the value of put options on the firm’s stock? A) Both reactions decrease the value of the put options. B) Both reactions increase the value of the put options. C) The change in volatility will not affect put option values while the increased stock price will decrease the put option values. D) The reactions will have offsetting effects on put option values.f) discuss the two assumptions underlying the analysis of option strategies: a) the stock pays no dividends, and b) there are no taxes or transaction costs. g) demonstrate an understanding of the position of buying or writing a call by identifying breakeven stock price, maximum profit, and maximum loss. h) demonstrate an understanding of the position of buying or writing a put by identifying the breakeven stock price, the maximum profit, and the maximum loss. i) define a covered call. j) demonstrate an understanding of the position of writing a covered call by identifying breakeven stock price, maximum profit, and maximum loss.
- If the fair value of a stock is more than its market value, which of the following is a reasonable conclusion? a. The stock has a low level of risk b. The stock offers a high dividend payout ratio c. The market is undervaluing the stock d. The market is overvaluing the stockExplain that an at-the-money call option on a given stock must cost more than an at-the-money put option on that stock with the same maturity. The stock will pay no dividends until after the expiration data.____________ is the most profitable transaction to undertake in a stock-index option, if the stock market is expected to fall substantially after the transaction is completed.