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 stock
III. time varying stock 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 basic Black-Scholes option-pricing model assumes that the stock price volatility is constant over time, and does not allow for early exercise of the option. However, research suggests that incorporating these factors - time varying volatility and early exercise possibility - provides more accurate pricing of options. Therefore, options-pricing models that allow for the possibility of early exercise and time varying volatility (i.e., choice B) provide more accurate pricing than the basic Black-Scholes option-pricing model.

Research Suggests That Option-Pricing Models That Allow for the Possibility