Question #27
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 13
Status: Unattempted
Question
Which of the following is NOT one of the assumptions of the Black-Scholes-Merton (BSM) option-pricing model?
Answer Choices:
A. There are no transaction costs, regulatory constraints, or taxes
B. The options valued are European style (early exercise is not allowed)
C. The yield on the underlying has a known and constant volatility
Explanation
Assumptions of BSM include:
The volatility of the return on the underlying is known and constant.
If the underlying instrument pays a yield, it is expressed as a continuous known and
constant yield at an annualized rate.