Empirical tests of the Black-Scholes option pricing formula
A)shows that binomial option pricing is used widely in practice, especially by international banks in trading OTC options.
B)works well for pricing American currency options that are at-the-money or out-of-the-money.
C)does not do well in pricing in-the-money calls and puts.
D)both b and c

Question

Quizplus · Accepted Answer

Empirical tests of the Black-Scholes option pricing formula have shown that it does not perform well in pricing in-the-money calls and puts. However, it works well for pricing American currency options that are at-the-money or out-of-the-money. As a result, binomial option pricing is used widely in practice, especially by international banks in trading OTC options. Therefore, both b and c are correct statements.

Empirical Tests of the Black-Scholes Option Pricing Formula