If the Implied Volatility Surface Is Flat (I

question 11

Multiple Choice

If the implied volatility surface is flat (i.e. ,all options have the same implied volatility) ,then

• A)Derman-Kani implied binomial trees cannot be constructed because of the lack of variability in the data.
• B)The Derman-Kani tree may price away-from-the-money options inaccurately.
• C)The Derman-Kani implied binomial tree coincides with the Cox-Ross-Rubinstein binomial tree.
• D)The Derman-Kani implied binomial tree may still differ from the Cox-Ross-Rubinstein (CRR)tree because implied binomial trees are a form of stochastic volatility models whereas CRR trees assume constant volatility.

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Definitions:

SIDS

Sudden Infant Death Syndrome, an unexplained death, usually during sleep, of a seemingly healthy baby less than a year old.

Birth Defects

Anomalies present at birth that can cause physical or mental disability, some of which may be life-threatening or require surgical intervention.

Low-Birth-Weight

A term used to describe newborns weighing less than 2500 grams (5 pounds, 8 ounces) at birth.

Prenatal Care

The health care that a pregnant woman receives before her baby is born, aimed at ensuring a healthy pregnancy and delivery.