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.

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Suggested Answer: C

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

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