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:

Hereditary Component

The genetic aspect of a trait or condition, indicating its potential transmission from parents to offspring.

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the phase of the memory process responsible for the storage of information for an extended period, from hours to a lifetime.

Delaying Reinforcement

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Diathesis-Stress Theory

A psychological framework suggesting that mental disorders develop from a vulnerable predisposition combined with stressful environmental factors.