Identify a problem associated with using the Black-Scholes model to value bond options.
A)It assumes short-term interest rates are constant.
B)It assumes that commissions are charged.
C)It assumes fluctuating variance of returns on the underlying asset.
D)It assumes that the variance of bond prices is constant over time.
E)All of the options.

Question

Quizplus · Accepted Answer

The Black-Scholes model assumes constant short-term interest rates, which is a limitation when valuing bond options, as interest rates can fluctuate.

Identify a Problem Associated with Using the Black-Scholes Model to Value