Question #80
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 37
Status: Unattempted
Correct Answer: A
Question
Which of the following is least likely one of the assumptions of the Black-Scholes-Merton option pricing model?
Answer Choices:
A. Changes in volatility are known and predictable
B. The risk-free rate of interest is known and does not change over the term of the option
C. The options are European
Explanation
The BSM model assumes that volatility of the return is known and constant (i.e., not
changing). Other assumptions of the BSM model include the continuously compounded
risk-free interest rate is known and constant and the options are European (meaning that
early exercise is not allowed).