If the Implied Volatility Surface Is Flat (I

question 14

Multiple Choice

If the implied volatility surface is flat (i.e., all options have the same implied volatility) , then

• A) Derman-Kani implied binomial trees cannot be constructed because of the lack of variability in the data.
• B) The Derman-Kani tree may price away-from-the-money options inaccurately.
• C) The Derman-Kani implied binomial tree coincides with the Cox-Ross-Rubinstein binomial tree.
• D) The Derman-Kani implied binomial tree may still differ from the Cox-Ross-Rubinstein (CRR) tree because implied binomial trees are a form of stochastic volatility models whereas CRR trees assume constant volatility.

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