In the Black-Scholes Formula,interest Rates Are Assumed to Be Constant

question 12

Multiple Choice

In the Black-Scholes formula,interest rates are assumed to be constant.This is not appropriate for pricing options on bonds primarily because

• A)The value of a bond is constant if interest rates are constant.
• B)Constant rates would mean no volatility in bond prices and no option value.
• C)Payoffs would be discounted at a constant rate.
• D)None of the above.

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Definitions:

Further Processing Costs

Additional costs incurred when processing products beyond their initial production stage to enhance their value.

Selling Price

The amount a seller charges a buyer for a product or service, determined by various factors including cost, demand, and competition.

Variable Overhead Costs

Overhead costs that fluctuate with the level of production activity, such as utilities for the manufacturing plant.

Operating Capacity

The maximum output or productivity level that a company can achieve using its current resources under normal working conditions.