Which of the Following Statements About the Binomial Option Pricing

question 54

Multiple Choice

Which of the following statements about the binomial option pricing model is not always true?

• A)it can capture the effect of early exercise
• B)it can accommodate a large number of possible stock prices at expiration
• C)it reflects the effects of the stock price,exercise price,risk-free rate,volatility and time to expiration
• D)it gives the price at which the option will trade in the market.
• E)none of the above

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Definitions:

Lockbox System

A service provided by banks to companies for the receipt of payment from customers, utilizing a special post office box to speed up the collection of checks.

Collection Time

The average period it takes for a business to receive payments owed by its customers for goods or services sold on credit.

Money Market Securities

Short-term financial instruments that are typically liquid and considered safe, such as Treasury bills and certificates of deposit.

Average Daily Float

The average amount of un-cleared or in-process checks and electronic payments that are recorded in a company’s accounting system at any given time.