QUESTION: 129

The advantages of the binomial model over the Black-Scholes model and its variations include:

The binomial model’s ability to incorporate a variety of conditions which can increase accuracy, including variations in expected volatility, dividends rates and risk-free discount rates as well as transaction costs.
The binomial model can be quite useful for valuing employee stock options as it is possible to include potential dilution, blackout periods, delayed vesting provisions, early exercise patterns and employee turnover in the model by increasing the number of periods and adjusting the option values at each node
Binomial model does not require more computations
Binomial Model does not have any liquidity problem

Answer(s): A,B

In creating employee stock options, the issuing company usually endeavors to set the option’s strike price at the fair market value of the underlying shares. When the strike price is set at the fair market value, the intrinsic value is___________ , and the only value of the option is its___________ .

One Value, market value
Zero value, time value
Current market value, zero value
Par value, zero value

Answer(s): B

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QUESTION: 131

Income that is eventually derived from the qualified stock option (QSO) is determined to be ordinary income if the receipt exercises the option to buy the underlying securities and subsequently sells the securities within 12 months. To get a tax break: