The Option Smirk in the Black-Scholes Option Model Indicates That

question 21

Multiple Choice

The option smirk in the Black-Scholes option model indicates that ________.

• A) implied volatility changes unpredictably as the exercise price rises
• B) stock prices may fall by a larger amount than the model assumes
• C) stock prices evolve continuously in today's actively traded markets
• D) stocks with lower exercise prices are more likely to pay dividends

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Definitions:

Discount Rate

The cost imposed on banks and similar entities for borrowing funds from the Federal Reserve's discount window.

Commercial Banks

Financial institutions that offer a wide range of services, including accepting deposits, providing loans, and other investment products to individuals and businesses.

Open Market

A freely competitive market in which any buyer or seller can participate, characterized by the absence of monopolies or exclusive control.

Government Bonds

Debt securities issued by a government to finance its expenditures, often backed by the government's ability to tax its citizens.