Question

Which of the following statements about the binomial option pricing model is not always true?​

	a.	​none of the above
	b.	​it can capture the effect of early exercise
	c.	​it gives the price at which the option will trade in the market.
	d.	​it reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration
	e.	​it can accommodate a large number of possible stock prices at expiration

Answer 1

Answer:

d. it reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration

The binomial model can easily accommodate the early exercise of an American option by simply replacing the computed value with the intrinsic value if the latter is greater. The model can price the option at each point of a specified time frame under the assumption of perfectly efficient markets. It is under the Black Scholes Merton (BSM) model which reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration not the binomial option pricing model.