Which of the Following Statements Is False

question 32

Multiple Choice

Which of the following statements is false?

• A) A replicating portfolio is a portfolio of other securities that has exactly the same value in one period as the option.
• B) By using the Law of One Price, we are able to solve for the price of the option as long as we know the probabilities of the states in the binomial tree.
• C) The binomial tree contains all the information we currently know: the value of the stock, bond, and call options in each state in one period, as well as the price of the stock and bond today.
• D) The idea that you can replicate the option payoff by dynamically trading in a portfolio of the underlying stock and a risk-free bond was one of the most important contributions of the original Black-Scholes paper. Today, this kind of replication strategy is called a dynamic trading strategy.

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Definitions:

Excise Taxes

Taxes imposed on specific goods, such as tobacco and alcohol, often intended to reduce consumption or generate revenue.

Marginal Tax Rate

The tax rate paid on an additional dollar of income.

Taxable Personal Income

The portion of an individual's earnings that is subject to taxation, after accounting for deductions and exemptions.

Proprietary Income

Income generated from owning a business or holding exclusive rights to a product or service.