1. If a financial analyst forecasts the volatility for a stock and find that it is significantly less than that implied by the prices of the puts and calls of the stock, he would conclude that:
A. puts and calls are underpriced.
B. the calls are overpriced and the puts are underpriced.
C. puts and calls are overpriced.
D. the puts are overpriced and the calls are underpriced.
2. Which of the following is an assumptions of the Black-Scholes-Merton (BSM) option-pricing model?
A. The distribution of the underlying stock price is normal.
B. the risk free rate is positively correlated with the underlying stock price.
C. Transaction costs are zero.
D. Options valued are American style.