When the Number of Time Periods in a Binomial Model

question 25

Multiple Choice

When the number of time periods in a binomial model is large,a European call option value does what?

• A)fluctuates around its intrinsic value
• B)converges to a specific value
• C)increases without limit
• D)converges to the European lower bound
• E)none of the above

Identify factors that cause a difference between a stock’s market value and its intrinsic value.

Grasp the role of the marginal investor in determining stock prices.

Understand the basic principles of the dividend discount model in stock valuation.

Recognize the premise of market equilibrium and its implications for investment.

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