When Black's Model Used to Value a European Option on the Spot

question 20

Multiple Choice

When Black's model used to value a European option on the spot price of an asset,which of the following is NOT true?

• A) It is necessary to know the futures or forward price for a contract maturing at the same time as the option
• B) It is not necessary to estimate income on the underlying asset
• C) It is not necessary to know the risk-free rate
• D) The underlying asset can be an investment or a consumption asset

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Definitions:

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, often represented by government bonds.

Call Increases

Situations where the price of call options rises, often due to an increase in the underlying asset's value.

Value

Value refers to the importance, worth, or usefulness of something, often determined by its desirability, utility, or monetary worth in economic contexts.

In The Money

A term describing an option contract that would lead to a positive cash flow to the holder if it were exercised immediately.