The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.

Question

Quizplus · Accepted Answer

The Black model is based on the assumption of constant volatility over the life of the option. This assumption is less accurate for longer-term options, as volatility tends to be more variable over longer time horizons. Therefore, the Black model's accuracy is greatest for options with short maturities.

The Black Model's Accuracy in Pricing Interest Rate Options Is