Q10 & Q11 CFAI Mock PM section

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morbius14

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Hi guys,
The scenario states “For the next two years IIG will have an option to purchase 50%……at any time”
I would think this means it is an American option no? since they can exercise at yr 1 or yr 2, which if true would make answers difference for both questions.. question 10
Help would be appreciated, thanks!
 
also, just going by the answer, the final calculation for the option is 3.67M..so how did they end up at 3.23M?
 
I don’t have it in front of me, but I believe I treated it as an American option, yes. Check the mock errata, this item set (and I think that question specifically) appeared on it - it may quell some of your concern.
 
Oh i see, the answer choice is correct now. I read on another thread that since it’s never optimal to exercise early for non-dividend paying assets, the value derived for American and European option will be the same.
Is this true? so do we just calculated it as if it’s always exercised at expiration if its non-dividend paying (as it is in this case)?
Thanks again for the help.
 
It’s never optimal to exercise the option for forwards, but for futures it is (for the mark-to-market). For this reason, American and European options on forwards are no different.
Still, I don’t have the mock in front of me so I don’t really remember this. I’m sorry.
 
I am a little bit confused here, recall from level 1, American call is more valuable than European call because it can be exerised early. so here in this question, I still don’t get it.
 
morbius14 wrote:
also, just going by the answer, the final calculation for the option is 3.67M..so how did they end up at 3.23M?
Click to expand...
and also same question here, only because the 3.2 is the most closet one,so we choose B?
 
Check the new errata, everything is correct. There was a change in strike price.
 
kobi wrote:
Check the new errata, everything is correct. There was a change in strike price.
Click to expand...
I have the new errata updated yestoday at hand, the ans is still 3.67m calculated from binominal tree and we choose B 3.2? only because it’s the closest one?
 
No they changed the answer choice too. B is supposed to be 3.67MM.
Also, the explanation for number 11 correctly says that the option is american so BS isn’t appropriate. But why is the answer b/c the option is european? It seems that the model would be LEAST appropriate b/c the option is AMERICAN.
 
yeah the “revised” test is sitll messed up apparently follow the link provided above and you’ll see they changed it.. The answer choice to 3.67 that is.
still think q11 wording sucks though could be read two different ways
 
Totally agree with that^ I’m counting on them using proper English for the actual test
 
I can’t believe they publish this the way they do and have to have two sets of errata to get this thing to look decent.
All they had to do was have someone take the test and they would automatically realize that choice be at 3.2 was wrong and that the strike price was wrong.
It is very strange that they do not have a maker checker go through all the problems in detail to make sure this dosesen’t happen prior to publishing.
 
Not changing anything to the end result, but still on Q10, shouldn’t the S+- value in year 2 be 27.6 instead of 28.25 ? Thanks.
 
And 1 more thing on this one: where does the call value on year 1 (5.59) come from ? thanks.
 
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