In the Black-Scholes formula,interest rates are assumed to be constant.This is not appropriate for pricing options on bonds primarily because
A)The value of a bond is constant if interest rates are constant.
B)Constant rates would mean no volatility in bond prices and no option value.
C)Payoffs would be discounted at a constant rate.
D)None of the above.

Question

Quizplus · Accepted Answer

is not valid-there is nothing incorrect about discounting option payoffs at a constant rate,as we do in the Black-Scholes framework.However,it is true that for bond options,were interest rates to change over time,discounting would occur at different rates over the life of the option.

In the Black-Scholes Formula,interest Rates Are Assumed to Be Constant