3. True or false questions, please state and some explanation.

a) Out-of-the-money calls have the highest expected returns and out-of-the-money puts have the lowest expected returns?

b) N(d) is the cumulative normal distribution, that is, the probability that a normally distributed variable is greater than d?

c) Of the five required inputs in the Black-Scholes formula only three are directly observable?

d) The Black-Scholes formula is derived assuming that the call is a European option?

e) The Black-Scholes Option Pricing Model can be derived from the Binomial Option Pricing Model by making the length of each period and then movement of the stock price per period, shrink torero and letting the number of periods grow infinitely large?

f) If you take the option price quoted in the market as an input and solve for the volatility, you will have an estimate of a stock's volatility known as the implied volatility?

g) By using the Law of One Price, we are able to solve for the price of the option as long as we know the probabilities of the states in th binomial tree?

h) The Black-Scholes formula can be used to price American call options on non-dividend-paying stocks?

i) We need to know the expected return on the stock to calculate the option price in the Black-Scholes Option pricing Model?

j) We can use the Black-Scholes formula to compute the price of a European put option on a non-dividend-paying stock by using the put-call parity formula?