The Option Smirk in the Black-Scholes Option Model Indicates That

question 21

Multiple Choice

The option smirk in the Black-Scholes option model indicates that ________.

• A) implied volatility changes unpredictably as the exercise price rises
• B) stock prices may fall by a larger amount than the model assumes
• C) stock prices evolve continuously in today's actively traded markets
• D) stocks with lower exercise prices are more likely to pay dividends

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Definitions:

Trade

Conducting transactions involving the exchange, sale, or purchase of goods and services by or among people and countries.

Consuming Outside

The act of purchasing and enjoying goods or services outside one’s home, such as dining at restaurants or outdoor markets.

Opportunity Cost

The sacrifice involved in not picking the subsequent preferable option at the time of decision-making.

Freight Train

A train that is used for transporting goods, cargoes, and commodities rather than passengers.