Empirical Tests of the Black-Scholes Option Pricing Model

question 72

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)show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
• E)All of the options.

Understand the concept of time value of money and its application in financial calculations.

Apply compound interest rate formulas to calculate future and present values of loans and investments.

Calculate payments for loans with different conditions, including variable interest rates and unequal payment sizes.

Determine effective and nominal interest rates based on different compounding periods.

---

Definitions:

Aggregate Demand

The complete market appetite for all goods and services in an economy, assessed at a defined price level during a particular duration.

Medium of Exchange

An intermediary instrument used to facilitate the sale, purchase, or trade of goods between parties.

Federal Funds Rate

The interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.

Federal Reserve

The central banking system of the United States, responsible for monetary policy, regulation of financial institutions, and stability of the financial system.