Multiple Choice
If the implied volatility surface is flat (i.e. ,all options have the same implied volatility) ,then
A) Derman-Kani implied binomial trees cannot be constructed because of the lack of variability in the data.
B) The Derman-Kani tree may price away-from-the-money options inaccurately.
C) The Derman-Kani implied binomial tree coincides with the Cox-Ross-Rubinstein binomial tree.
D) The Derman-Kani implied binomial tree may still differ from the Cox-Ross-Rubinstein (CRR) tree because implied binomial trees are a form of stochastic volatility models whereas CRR trees assume constant volatility.
Correct Answer:
Verified
Correct Answer:
Verified
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