When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock, which of the following is true?
A. The binomial tree price converges to a price slightly above the Black-Scholes-Merton price as the number of time steps is increased
B. The binomial tree price converges to a price slightly below the Black-Scholes-Merton price as the number of time steps is increased
C. Either A or B can be true
D. The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased
D
The binomial tree valuation method and the Black-Scholes-Merton formula are based on the same set of assumptions. As the number of time steps is increased the answer given by the binomial tree approach converges to the answer given by the Black-Scholes-Merton formula.
You might also like to view...
Distributed HR is the idea that more and more human resource management tasks are now being redistributed from a central HR department to the company's employees and line managers
Indicate whether this statement is true or false.
What is the future value in year twelve of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4.00% per year?
A) $90,154.83 B) $93,761.02 C) $28,675.97 D) $32,117.08