Empirical tests of the Black-Scholes option pricing model
A)show that the model generates values fairly close to the prices at which options trade.
B)show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls.
C)indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
D)show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks.
E)All of the options.

Question

Quizplus · Accepted Answer

Studies have shown that the model tends to undervalue deep in-the-money calls and to overvalue deep out-of-the-money calls.

Empirical Tests of the Black-Scholes Option Pricing Model