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:

7-year Property

Refers to assets that have a recovery period of 7 years under the Modified Accelerated Cost Recovery System for depreciation.

AMT Purposes

AMT purposes relate to the calculation for the Alternative Minimum Tax, a supplemental income tax required in addition to baseline income tax for certain individuals, corporations, estates, and trusts.

AMT Depreciation Adjustment

Adjustments made for alternative minimum tax purposes, recalculating depreciation based on specific AMT rules.

7-year Property

Assets, such as machinery and equipment, used in a business, deemed to have a depreciable life of 7 years for tax purposes.