If We Use the Black-Scholes Model for Bond Options,then We

question 7

Multiple Choice

If we use the Black-Scholes model for bond options,then we assume that bond prices are lognormal,as the underlying asset in the Black-Scholes model is assumed to have a lognormal distribution.Which of the following is not a consequence of this assumption?

• A)Bond prices are non-negative.
• B)Interest rates are non-negative.
• C)Bond prices are positively skewed.
• D)Interest rates are not skewed.

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Definitions:

Loss Chance

The probability or likelihood that an investment will yield a return lower than the original investment.

Capital Gains

The profit from the sale of an asset or investment, where the sale price exceeds the purchase price.

Price Appreciation

An increase in the market value of an asset over time, often influenced by factors such as demand, inflation, and market conditions.

Risky Securities

Financial instruments that carry a high degree of investment risk due to the potential for significant fluctuations in value.