Why does a discounted cash-flow approach to options valuation not work?
A)It is impossible to estimate expected cash flows.
B)One cannot find the appropriate interest rate for an infinitely small interval.
C)Finding the opportunity cost of capital is impossible as the risk of options changes every time the stock price moves.
D)The strike price of options changes.

Question

Quizplus · Accepted Answer

Option valuation using discounted cash-flow requires the estimation of an appropriate discount rate, which is typically the opportunity cost of capital. However, the risk of options is not constant and changes with every movement in the stock price, making it difficult to find a suitable discount rate.

Why Does a Discounted Cash-Flow Approach to Options Valuation Not