The Black-Scholes-Merton option pricing model:
A) Is used to value calls only
B) Incorporates the stock's price, not the exercise price into its computation
C) Base the value of an option strictly on that option's intrinsic value
D) Considers the relationship between the market return and stock return into the option calculation
E) Recognizes the fact that dividend yields vary from one stock to another

Question

Quizplus · Accepted Answer

The Black-Scholes-Merton option pricing model incorporates various factors into its computation, including the current stock price, the option's strike price, the time to expiration, the risk-free rate, and the volatility of the stock's returns. It also accounts for dividend yields, recognizing that they can vary between stocks, which is reflected in choice E. The model is not limited to valuing calls only, it does not base the option's value strictly on intrinsic value, and it does not consider the relationship between market return and stock return in its calculation.

The Black-Scholes-Merton Option Pricing Model