PART A-

We can allow for stochastic (randomly varying over time) volatility inour complete markets method of option pricing so long as that volatility is tradeable in the market.

True

False

PART B

When we value options, you may say that we are really valuing a portfolio of stock and options that exactly replicate the payoff of a risk-free bond.

True

False

PART C

In binomial option valuation, we need to know the expected return on the stock (that is, we need the probability of the stock increasing or decreasing).

True

False

PART D

Speculators in futures markets provide liquidity which:

		raises transaction costs.
		lowers transaction costs.
		increases excess volatility.
		causes panics and crashes.