All the inputs in the Black-Scholes Option Pricing Model are directly observable except
A)the price of the underlying security.
B)the risk free rate of interest.
C)the time to expiration.
D)the variance of returns of the underlying asset return.
E)none of the above.

Question

Quizplus · Accepted Answer

The variance of returns of the underlying asset return is not directly observable as it is based on past data and is subject to future uncertainty. It is estimated using historical data or implied volatility from options prices. The other inputs, namely, the price of the underlying security, the risk-free rate of interest, and the time to expiration are all directly observable.

All the Inputs in the Black-Scholes Option Pricing Model Are