When the Black-Scholes-Merton and Binomial Tree Models Are Used to Value

question 1

Multiple Choice

When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock,which of the following is true?

• A) The binomial tree price converges to a price slightly above the Black-Scholes-Merton price as the number of time steps is increased
• B) The binomial tree price converges to a price slightly below the Black-Scholes-Merton price as the number of time steps is increased
• C) Either A or B can be true
• D) The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased

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Definitions:

Marginal Cost

The expense associated with manufacturing an extra unit of a product or service.

Marginal Revenue

The increase in revenue that results from the sale of one additional unit of a product or service.

Positive Profit

Positive profit occurs when a business's total revenues exceed its total costs, indicating financial gain from its operations.

Marginal Costs

Relates to the additional expenses faced when a business decides to increase its output or product quantity by one more unit.