Empirical Tests of the Black-Scholes Option Pricing Formula

question 51

Multiple Choice

Empirical tests of the Black-Scholes option pricing formula

• A)have faced difficulties due to nonsynchronous data.
• B)suggest that when using simultaneous price data and incorporating transaction costs they conclude that the PHLX American currency options are efficiently priced.
• C)suggest that the European option-pricing model works well for pricing American currency options that are at- or out-of-the money,but does not do well in pricing in-the-money calls and puts.
• D)all of the options

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Definitions:

Alpha Level

The probability of incorrectly rejecting the null hypothesis that is used by a researcher to decide whether an outcome of a study is statistically significant (most commonly, researchers use a probability of .05).

Statistical Significance

Rejection of the null hypothesis when an outcome has a low probability of occurrence (usually .05 or less) if, in fact, the null hypothesis is correct.

Probability Level

The threshold of significance, usually denoted as alpha (α), indicating the likelihood of observing the data if the null hypothesis is true.

Systematic Variance

The part of variance in a set of data that is attributable to identified sources or factors, as opposed to random or error variance.