In Situations Where an Option-Pricing Model Is Required to Be

question 14

Multiple Choice

In situations where an option-pricing model is required to be used to determine the fair value of equity instruments granted AASB 2 Share-based Payment:

• A) requires expected dividends to be taken into account when measuring the shares or options granted.
• B) allows the entity to choose the option-pricing model it wishes to use, but contains a number of factors that the option-pricing model selected must take into account as a minimum.
• C) requires the use of a binominal option-pricing model.
• D) requires the use of the Black-Scholes-Merton formula.

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Definitions:

Walras's Law

A principle in general equilibrium theory stating that if all markets but one are in equilibrium, then the remaining market must also be in equilibrium.

Cobb-Douglas Utility Functions

A particular form of utility function used in economics that represents preferences over two goods, characterized by their constant elasticity of substitution.

Pareto Optimal

A distribution state of resources where no adjustment can be made to better the position of any individual or evaluation criterion without negatively affecting another.

Consumption Externalities

The impact of one's consumption activities on the welfare of others that is not reflected in market prices, either positive or negative.