Important Assumptions Justifying the Black-Scholes Formula Include

question 13

Multiple Choice

Important assumptions justifying the Black-Scholes formula include:
I.The price of the underlying asset follows a lognormal random walk.
II.Investors can adjust their hedge ratio 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

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Definitions:

Simple Interest

Interest earned only on the original principal amount, without compounding.

Daily Closing Balance

The amount of money in an account at the end of each business day, after all transactions have been accounted for.

GICs

Guaranteed Investment Certificates are a form of investment in Canada that ensures a fixed rate of return for a specific duration.

Simple Interest

Interest calculated on the principal amount of a loan or deposit, not including any previously earned interest.