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:

Intrinsic Motivation

Motivation that is driven by an interest or enjoyment in the task itself, rather than external pressure or reward.

Extrinsic Motivation

Motivation stimulated by external incentives like financial gain, recognition, academic scores, and commendation.

Self-Disclosure

The process of disclosing confidential, personal details about oneself to other people.

Glucose

A basic form of sugar that serves as a crucial source of energy for living beings and is found in numerous carbohydrates.