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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:

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Suggested Answer: C

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

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Jennifer
16 days 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
1 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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Harrison
1 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
2 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
3 days ago
User 2: Yeah, that's right. Gotta keep those stock prices pure, no dividends allowed!
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Luis
15 days 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
1 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
1 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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Aliza
1 months 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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Nada
1 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
18 days ago
User 2: Definitely, it's all about those Black-Scholes details.
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Nettie
20 days 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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