If e is the base of natural logarithms; (σ)is the standard deviation of the continuously compounded annual returns on the asset; and h is the time to expiration, expressed as a fraction of a year, then the quantity (1 + upside change)is equal to
A)e^[(σ)× SQRT(h)].
B)e^[h × SQRT(σ)].
C)(σ)× e^[SQRT(h)].
D)1/(σ)× e^[SQRT(h)].

Question

Quizplus · Accepted Answer

The formula for the upside change in Black-Scholes model is:
(1 + upside change) = e^[(σ)× SQRT(h)]
Therefore, the correct choice is A, which matches this formula.

If E Is the Base of Natural Logarithms; (σ)Is the Standard