The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.
A)I and II
B)I and III
C)II and II
D)I, II, and IV

Question

Quizplus · Accepted Answer

The Black-Scholes formula considers a constant risk-free interest rate and volatility of the stock price, as well as the absence of sudden extreme jumps in stock prices. However, it does not assume a constant expected rate of return on the stock. Therefore, options pricing under the Black-Scholes model assumes a constant risk-free interest rate, volatility of the stock price, and no sudden extreme jumps in stock prices.

The Black-Scholes Formula Assumes That I) the Risk-Free Interest Rate