The Black-Scholes Model Differs from the Binomial in That

question 13

Multiple Choice

The Black-Scholes model differs from the binomial in that

• A) The mathematics it requires is much simpler.
• B) It provides closed-form solutions for option prices, so can price European options faster than the binomial model.
• C) It can handle stochastic interest rates more efficiently than the binomial.
• D) It was developed after the binomial model and is therefore more current.

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Definitions:

Drawer

The party in a transaction who writes and signs a check or draft instructing a drawee, such as a bank, to pay a specified sum of money to the payee.

Drawee

The person or entity upon whom a check, draft, or bill of exchange is drawn and who is expected to pay it.

Payee

The person or entity to whom a payment is to be made or who receives the payment.

Negotiable Instruments

Financial documents, like checks or promissory notes, that guarantee payment of a specific amount of money to the bearer under certain conditions.