The important assumptions of the Black-Scholes formula are:
I. the price of the underlying asset follows a lognormal random walk. II) investors can adjust their hedge continuously and at no cost.
III. the risk-free rate is known.
IV. the underlying asset does not pay dividends.
A) I only
B) I and II only
C) I, II, III and IV
D) III and IV only

Question

Quizplus · Accepted Answer

The Black-Scholes formula assumes that the underlying asset's price follows a lognormal distribution, investors can hedge continuously without cost, the risk-free rate is constant and known, and the asset does not pay dividends.

The Important Assumptions of the Black-Scholes Formula Are