Question 1

The Black and Scholes option pricing model makes an assumption that the stock pays dividends during the time the option is outstanding.

Accepted Answer

The Black-Scholes model assumes that the stock does not pay dividends during the life of the option.

Question 2

For call options,the positive relationship between price and time is

Accepted Answer

The positive relationship between price and time for call options is due to an increase in intrinsic value because lower present values of the exercise price for longer time periods result in higher option prices. This is because the possibility of price movements in your favor increases with more extended time periods.

Question 3

In the Black and Scholes Option Pricing Model the put and call prices are a function of which of the following:

Accepted Answer

The Black and Scholes Option Pricing Model takes into consideration all the factors listed in the options given: the current market price of the underlying stock and the strike price, the time remaining until expiration, the riskless rate of interest, and the volatility of the stock price expressed as the statistical measure "variance". Therefore, the correct answer is choice D, which includes all of the above factors.

Question 4

The Black and Scholes option pricing model makes an assumption that stock prices are lognormally distributed with a constant variance for the underlying returns.

Accepted Answer

The Black and Scholes option pricing model does assume that stock prices are lognormally distributed with a constant variance for the underlying returns.

Question 5

The Black and Scholes option pricing model makes an assumption that markets have taxes and transactions costs.

Accepted Answer

The Black and Scholes option pricing model assumes a market with no taxes and no transaction costs. This simplifies the model and allows for easier calculations, but may not accurately represent real-world markets.

Question 6

The Black and Scholes option pricing model makes an assumption that the stock pays no dividends or makes no other distributions.

Accepted Answer

The Black and Scholes model is based on the assumption that the underlying stock does not pay any dividends or make any other distributions during the life of the option. This is because the presence of dividends can affect the pricing of the option, and thus a different pricing model like the binomial option pricing model would be more suitable.

Question 7

The Black and Scholes option pricing model makes an assumption that the option could only be exercised at maturity.

Accepted Answer

The Black-Scholes model is designed for European options, which can only be exercised at maturity, unlike American options that can be exercised at any time before expiration.

Question 8

One of the foundations of the Black Scholes Option Pricing Model was that the shares of stock and call option combined to form

Accepted Answer

The Black Scholes model assumes that the shares of stock and call option combined create a riskless hedge that duplicates the return of a discount bond with the same maturity length as the option. This assumption forms the foundation of the model, allowing for the calculations of the option's price and the option's implied volatility.

Question 9

The Black and Scholes option pricing model makes an assumption that the option could be exercised before maturity.

Accepted Answer

The Black-Scholes model assumes European options, which can only be exercised at maturity, not before.

Question 10

The Black and Scholes option pricing model makes an assumption that stock prices are normally distributed with a constant mean returns over the period of the option.

Accepted Answer

The Black-Scholes model assumes that stock prices follow a lognormal distribution, not a normal distribution, and that the returns are normally distributed.

Question 11

What does the Black and Scholes Option Pricing model mean by "markets are frictionless"?

Accepted Answer

The term "markets are frictionless" in the Black and Scholes Option Pricing model implies that there are no taxes, no transaction costs, securities are infinitely divisible, and all participants can borrow or lend at a constant riskless rate.

Question 12

For call options the price is positively related to

Accepted Answer

Call option price is positively related to the stock's price changes and the volatility of the stock price changes, as well as to the time to maturity and the riskless rate of interest. Therefore, the correct answer is D) A) and B). The strike price, however, has a negative relationship with the call option price, i.e. an increase in the strike price leads to a decrease in the call option price.

Question 13

For put options,the price is always positively related to

Accepted Answer

For put options, the price is always positively related to the strike price and the volatility of the stock price changes. This is because the higher the strike price, the more valuable the option is and the more volatile the stock price, the more likely the price will drop below the strike price, making the option valuable. The price of a put option is not related to the stock's price changes or the riskless rate of interest. The time to maturity can have an effect on the price of a put option, but this relationship is not always positive.

Question 14

The Black and Scholes option pricing model makes an assumption that markets are frictionless.

Accepted Answer

The Black and Scholes option pricing model assumes frictionless markets, meaning that there are no transaction costs, taxes, or other barriers to trading.

Question 15

The Black and Scholes option pricing model makes an assumption that markets have normal friction.

Accepted Answer

The Black-Scholes model assumes that markets are frictionless, meaning there are no transaction costs or taxes, and that assets can be traded continuously.

Question 16

The Black and Scholes option pricing model makes an assumption that markets have no taxes or transactions costs.

Accepted Answer

The Black and Scholes option pricing model assumes that markets have no taxes or transactions costs in order to simplify the calculation of option pricing.

Question 17

Which of the following is NOT an assumption of the Black and Scholes Option Pricing Model?

Accepted Answer

The answer of Which of the following is NOT an...

Quiz 24: a Black Scholes Option Pricing Model