What is the recommended way of making volatility a function of time in a Cox, Ross, Rubinstein tree? ( )
A. Make u a function of time
B. Make p a function of time
C. Make u and p a function of time
D. Make the lengths of the time steps unequal
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A binomial tree prices an American option at $3.12 and the corresponding European option at $3.04. The Black-Scholes price of the European option is $2.98. What is the control variate price of the American option? ( )
A. $3.06
B. $3.18
C. $2.90
D. $3.08
Why do traders use volatility smiles for pricing options? ( )
A. To allow for non-lognormality of the probability distribution of future asset price
Because it is consistent with recent market moves
C. As a tool to reflect their views about extreme market moves
D. Because extreme market moves are always more likely than Black-Scholes-Merton assumes
What does the shape of the volatility smile reveal about put options on equity? ( )
A. Options close-to-the-money have the lowest implied volatility
B. Options deep-in-the-money have a relatively high implied volatility
C. Options deep-out-of-the-money have a relatively high implied volatility
D. All of the above
What does the shape of the volatility smile reveal about call options on a currency? ( )
A. Options close-to-the-money have the lowest implied volatility
B. Options deep-in-the-money have a relatively high implied volatility
C. Options deep-out-of-the-money have a relatively high implied volatility
D. All of the above
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