In the Black-Scholes setting, the prices of American options
A) Cannot be determined because the model assumes away the human impatience that leads to early exercise of options.
B) Cannot be determined because the model does not describe the intermediate stock prices that are required to decide on whether to exercise an option early.
C) Cannot be determined because the model assumes a continuous-time process, whereas to determine early-exercise you need a discrete-time model.
D) Cannot be determined in closed-form.

Question

Quizplus · Accepted Answer

The Black-Scholes model is designed for European options, which do not allow for early exercise. While it provides a closed-form solution for European options, it cannot do the same for American options due to their early exercise feature. This limitation means that while the model can be adapted or extended to estimate American option prices, it does not provide a direct, closed-form solution for them.

In the Black-Scholes Setting, the Prices of American Options