Executive options are different from standard options in a number of ways.Consider the following two statements:
(i) A freeze-out period lowers the value of a standard option compared to an executive option.
(ii) The Black-Scholes formula cannot be used to value executive options, if the volatility of equity
Changes randomly over time.
A)(i) is correct, (ii) is incorrect.
B)(i) is incorrect, (ii) is correct.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)only (ii) is correct, but only if the option comes with a freeze out.

Question

Quizplus · Accepted Answer

(i) is incorrect because a freeze-out period actually increases the value of a standard option compared to an executive option. This is because during the freeze-out period, executives with executive options are unable to exercise their options, while those holding standard options can still exercise them. This gives standard option holders more flexibility and value.
(ii) is correct because the Black-Scholes formula assumes a constant volatility, and if the volatility of equity changes randomly over time (as it often does), the formula cannot accurately value executive options.

Executive Options Are Different from Standard Options in a Number