Which Statement About the Argument Underlying the Black-Scholes-Merton Model Is

question 11

Multiple Choice

Which statement about the argument underlying the Black-Scholes-Merton model is INCORRECT?

• A) The argument utilizes a practice common among option writers in nineteenth-century London: hedge an option position with an opposing stock trade.
• B) The argument combines and solves the pricing and hedging problem in one stroke.
• C) The argument assumes that call and underlying stock prices are positively correlated.
• D) The argument combines the call and the underlying stock to form a riskless portfolio that is assumed to grow at the risk-free rate.
• E) The argument assumes that all traders are risk-neutral,and therefore one can value the option by taking expected discounted values.

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Definitions:

Area

The extent or measurement of a surface; the size of a two-dimensional space.

Z-score

A statistical measure that indicates the number of standard deviations a data point is from the mean.

Normal Random Variable

A random variable that has a distribution defined by a normal curve, characterized by its mean and variance.

Mean

A measure of central tendency calculated by dividing the sum of all values in a dataset by the number of values.