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
Answer: C
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Binomial Options Pricing Model
- Pricing a put with the binomial model is the same procedure as pricing with a call, except that the
- Which of the following statements about the binomial model is incorrect?
- In a one-period binomial model with Su = 49.5, Sd = 40.5, p = 0.8, r = 0.06, S = 45 and X = 50, what is a European put worth?
- Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left in an American call's life. What will the option be worth?
- In the binomial model, if an option has no chance of expiring out-of-the-money, the hedge ratio will be
- Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.
- When the number of time periods in a binomial model is large, what happens to the binomial probability of an up move?
- In a non-recombining tree, the number of paths that will occur after three periods is
- Which of the following are not path-dependent options when the stock pays a constant dividend yield?
- If the binomial model is extended to multiple periods for a fixed option life, which of the following adjustments must be made?
- When puts are priced with the binomial model, which of the following is true?
- The values of u and d are which of the following?
- In a two-period binomial world, a mispriced call will lead to an arbitrage profit if
- In a binomial model, if the call price in the market is higher than the call price given by the model, you should
- A portfolio that combines the underlying stock and a short position in an option is called
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