In the Black-Scholes Framework,return Volatility Is Assumed to Be Constant

question 6

Multiple Choice

In the Black-Scholes framework,return volatility is assumed to be constant over the life of the option.This is not theoretically appropriate for pricing options on (default-risk-free) bonds because

• A)Empirically,interest rates are known to change over time,so bond volatility will change over time.
• B)Even if interest rates are constant over time,the duration of the bond will change over time,and duration is a measure of volatility.
• C)Constant return volatility on a zero-coupon bond is possible only if the bond price does not change over time.
• D)The bond price at maturity is known for certain,so volatility must go down as maturity approaches.

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Definitions:

Peripheral Nerves

Nerves that are located outside of the brain and spinal cord, responsible for transmitting sensory and motor information between the central nervous system and the rest of the body.

Endorphins

Peptides produced by the central nervous system and the pituitary gland, known for their ability to act as natural painkillers.

Heroin

An opioid drug made from morphine, a natural substance taken from the seed pod of various opium poppy plants.

Neurons

Electrically excitable cells that communicate with other cells via specialized connections called synapses, functioning as the basic working unit of the brain.