The Black-Scholes Formula Assumes That I) the Risk-Free Interest Rate

question 79

Multiple Choice

The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option.
II) the stock price volatility is constant over the life of the option.
III) the expected rate of return on the stock is constant over the life of the option.
IV) there will be no sudden extreme jumps in stock prices.

• A) I and II
• B) I and III
• C) II and II
• D) I, II, and IV
• E) I, II, III, and IV

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Definitions:

Calls

Financial instruments giving the holder the right to buy a stock or commodity at a specified price within a specific time period.

Variable Costs

Expenses that vary directly with the level of production or output.

Variable Cost

Expenses that change in direct proportion to the amount of business or production activity.

Variable Cost Per Unit

The cost that varies with the level of output or activities, calculated on a per-unit basis.