An Option-Trading Firm Is Using the Black-Scholes (1973)model to Price

question 21

Multiple Choice

An option-trading firm is using the Black-Scholes (1973) model to price their options using the same level of volatility for all strikes.The market anticipation is that sharp negative gapping behavior is likely given that sudden recessionary information is being released in spurts.By using the Black-Scholes model with a constant volatility the firm is

• A)Underpricing out-of-the-money calls relative to in-the-money puts.
• B)Underpricing out-of-the-money puts relative to in-the-money calls.
• C)Underpricing out-of-the-money puts and in-the-money puts relative to those at-the-money.
• D)Underpricing out-of-the-money puts relative to those at-the-money.

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