Empirical Tests of the Black-Scholes Option Pricing Model

question 70

Multiple Choice

Empirical tests of the Black-Scholes option pricing model

• A) show that the model generates values fairly close to the prices at which options trade.
• B) show that the model tends to overvalue deep in-the-money calls and undervalue deep out-of-the-money calls.
• C) indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
• D) show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
• E) All of the options are correct.

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Definitions:

Probability Assignment

The process of assigning a numerical value between 0 and 1 to the likelihood of an event's occurrence.

Legitimate

Something that is lawful, genuine, and recognized as valid.

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Probability

The evaluation of the probability that an event will come to pass, conveyed by numbers 0 through 1.