What Happens When the Volatility Is Zero in the Black-Scholes-Merton

question 34

Multiple Choice

What happens when the volatility is zero in the Black-Scholes-Merton model?

• A)the option price converges to either zero or the lower bound
• B)the option price converges to the intrinsic value
• C)the option automatically expires out of the money
• D)the gamma and delta converge
• E)none of the above

---

Definitions:

Critical Value

The boundary value from a statistical distribution where, if the observed test statistic is beyond this point, the null hypothesis is rejected.

Null Hypothesis

A default statement suggesting that there is no statistical significance between the specified datasets, or no effect of a certain variable.

T-statistic

A type of statistic used in hypothesis testing, calculated as the difference between an observed sample mean and a hypothesized population mean, divided by the standard error of the mean.

Level of Significance

The level of significance is a threshold set by the researcher to determine the cutoff at which the null hypothesis can be rejected, commonly represented by alpha (α).