Research suggests that option pricing models that allow for the possibility of ________ provide more accurate pricing than does the basic Black-Scholes option pricing model.
I. early exercise
II. changing expected returns of the share
III. time varying share price volatility
A)II only
B)I and III only
C)II and III only
D)I, II and III

Question

Quizplus · Accepted Answer

The Black-Scholes option pricing model assumes that options are only exercised at expiration and that the expected returns of the underlying shares are constant. However, in reality, the option holder may decide to exercise the option before expiration, and the share price volatility may change over time. Therefore, option pricing models that allow for the possibility of early exercise and time-varying share price volatility provide more accurate pricing than the basic Black-Scholes model that assumes constant expected returns and no early exercise.

Research Suggests That Option Pricing Models That Allow for the Possibility