When Black's Model Used to Value a European Option on the Spot

question 20

Multiple Choice

When Black's model used to value a European option on the spot price of an asset,which of the following is NOT true?

• A) It is necessary to know the futures or forward price for a contract maturing at the same time as the option
• B) It is not necessary to estimate income on the underlying asset
• C) It is not necessary to know the risk-free rate
• D) The underlying asset can be an investment or a consumption asset

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Definitions:

Utility

An economic term that represents the satisfaction or pleasure individuals gain from consuming goods or services.

Risk Neutral

A situation or attitude wherein an individual or entity is indifferent to risk when making investment decisions, caring only about the expected outcome.

Income Potential

The maximum earnings possible for a person or entity, considering various factors like skills, market demand, and economic conditions.

Expected Value

The anticipated value of a variable, computed as the sum of all possible values each multiplied by the probability of its occurrence.