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Why Do We Assume a Lognormal Distribution in Option Pricing

question 10

Essay

Why do we assume a lognormal distribution in option pricing? Ask the class to explain the pluses and minuses to this assumption.Once the downfalls are established,probe students to find out if a better alternative exists.


Definitions:

Population Estimates

Calculations that infer the number of individuals in a population at a certain time.

Variability

How much the data points in a statistical distribution or dataset deviate from the mean or average.

Data Sets

Collections of related data points, observations, or variables organized for analysis.

Sources of Cash

Various origins from which a company or individual may receive cash, such as operations, financing activities, and investing activities.

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