Empirical Tests of the Black-Scholes Option Pricing Model

question 45

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) a and c.
• E) a,b,and c.

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Definitions:

Units Produced

This refers to the total number of complete units manufactured during a specific period by a company.

Fixed Factory Overhead Volume Variance

The difference between the budgeted and actual fixed overhead costs based on the volume of production.

Standard Factory Overhead Rate

The predetermined rate used in cost accounting to allocate estimated overhead costs to individual units of production based on a consistent measure, like labor hours.

Machine Hour

A measure of the amount of time a machine is operated, used in allocating manufacturing costs to products based on the number of hours the machines are used in production.