The risk-free rate used in the Black-Scholes-Merton model is the:
A) 30-day Treasury bill.
B) 90-day Treasury bill.
C) 1-year Treasury bill.
D) 10-year Treasury bond.
E) Treasury bill with the same maturity as the option.

Question

Quizplus · Accepted Answer

The risk-free rate used in the Black-Scholes-Merton model should be the Treasury bill with the same maturity as the option. This reflects the fact that the risk-free rate should be consistent with the time frame of the option being valued. Other choices such as the 30-day or 90-day Treasury bill may not accurately reflect the time horizon of the option. The 1-year or 10-year Treasury rates are also not appropriate as they are not directly related to the option's maturity. Therefore, E is the best choice.

The Risk-Free Rate Used in the Black-Scholes-Merton Model Is The