Important Assumptions Justifying the Black-Scholes Formula Include the Following

question 44

Multiple Choice

Important assumptions justifying the Black-Scholes formula include the following:

• A)The price of the underlying asset follows a lognormal random walk.
• B)The price of the underlying asset follows a lognormal random walk and investors can adjust their hedge ratio continuously and at no cost.
• C)The price of the underlying asset follows a lognormal random walk, investors can adjust their hedge ratio continuously and at no cost, the risk-free rate is known, and the underlying asset does not pay dividends.
• D)The risk-free rate is known and the underlying asset does not pay dividends.

---

Definitions:

Excise Tax

A tax levied on specific goods, services, and activities, such as gasoline, alcohol, and tobacco.

Supply Curve

is a graphical representation of the relationship between the price of a good and the quantity of that good that suppliers are willing to produce and sell.

Total Revenue

The sum total of earnings received by a firm for products sold or services rendered during a particular period.

Demand for Cigarettes

The consumer's desire and willingness to purchase cigarettes at various prices, often studied for its health and economic implications.