The Black-Scholes Model Is Based on a Posited Stochastic Process

question 12

Multiple Choice

The Black-Scholes model is based on a posited stochastic process for stock prices,where the movements in the stock are represented mathematically by a stochastic differential equation (SDE) .Which of the following statements is most valid?

• A)The SDE is a differential equation that changes over time.
• B)The solution to the SDE is a random function of time.
• C)The solution to the SDE is a deterministic function of time.
• D)The solution to the SDE is the Black-Scholes formula.

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Definitions:

Trochanter

A large, bony prominence found on the femur, serving as a major attachment point for muscles.

Fossa

A depression or hollow, often found in bones or in the body, serving various purposes like accommodating muscles or organs.

Sinus

A cavity within a bone or other tissue, most commonly found in the nose and respiratory system.

Chondrocostal

Pertaining to the cartilage connected to the ribs, often used in the context of the chest structure and related conditions.