Discuss NACVA CVA Exam Topic 7 Question 128

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.

Suggested Answer: D

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24 comments · newest first

Kimbery 2 days ago

D also feels off. Using unadjusted prices? Not realistic.

King 8 days ago

Agreed. C seems too simplistic for American options.

Latosha 13 days ago

I feel like C is the odd one out. It doesn't fit the pseudo-American model.

Tawny 18 days ago

Yeah, especially with dividends involved.

Annalee 23 days ago

I think the question is tricky. Options valuation can be complex.

Dortha 28 days ago

Same here! Good luck, everyone!

Effie 1 month ago

I feel confident about this one now.

Sue 1 month ago

Definitely! It’s clear when you break it down.

Pilar 1 month ago

So, we all think C is the answer?

Sina 2 months ago

Exactly! The focus should be on adjusting for dividends.

Gearldine 2 months ago

I remember learning that C is not part of the pseudo-American model.

Dortha 2 months ago

Right! The others focus on American options and dividends.

Effie 2 months ago

Yes, C doesn't fit with the others. It’s about European options.

Sue 2 months ago

Agreed! I feel like C is the odd one out.

Pilar 2 months ago

I think this question is tricky. The steps are very specific.

Katlyn 3 months ago

Wait, are we really using unadjusted prices? That sounds sketchy!

Jerrod 3 months ago

Totally agree with C), that doesn't fit the model.

Jacklyn 3 months ago

D) seems off to me, not sure about that one.

Nan 3 months ago

I think C) is the odd one out here.

Leanora 3 months ago

A) is definitely part of the process.

Joseph 4 months ago

I vaguely recall that the pseudo-American model involves adjustments for dividends, so I wonder if option A could be the correct answer since it seems to align with that concept.

Brock 4 months ago

I practiced a similar question where we had to identify incorrect steps in option pricing models, and I feel like option C might be misleading since it suggests a direct comparison with European options.

Dierdre 4 months ago

I think option D stands out as the odd one out because it mentions using the unadjusted stock price, which seems inconsistent with the adjustments for dividends in the other options.

Annice 4 months ago

I remember studying the steps for valuing American options, but I'm not entirely sure about the role of the European option in this context.

NACVA CVA Exam - Topic 7 Question 128 Discussion