The Black-Scholes option pricing model employs which five parameters?
A)Stock price, exercise price, risk-free rate, beta, and time to maturity
B)Stock price, risk-free rate, beta, time to maturity, and variance
C)Stock price, risk-free rate, probability of bankruptcy, variance, and exercise price
D)Stock price, exercise price, risk-free rate, variance, and time to maturity

Question

Quizplus · Accepted Answer

The Black-Scholes option pricing model takes into account the stock price, exercise price, risk-free rate, variance, and time to maturity. Therefore, the correct choice is D. Choice A is incorrect as it includes beta, which is not a parameter used in the Black-Scholes model. Choice B is incorrect as it includes probability of bankruptcy, which is not a relevant parameter for option pricing. Choice C is incorrect as it includes both beta and probability of bankruptcy, neither of which are used in the Black-Scholes model.

The Black-Scholes Option Pricing Model Employs Which Five Parameters