Which of the Following Is a Limitation of Using the Black

question 27

Multiple Choice

Which of the following is a limitation of using the Black model to price interest rate options?

• A)the risk-free rate is not constant
• B)the volatility is not constant
• C)interest rates are not lognormally distributed
• D)all of the above
• E)none of the above

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Definitions:

Equilibrium

A state in which market supply and demand are balanced, and as a result, prices become stable.

Market

A place or system where buyers and sellers interact to trade goods, services, or resources.

Price

The money total set, required, or given as remuneration for something.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay.