Why Was Black's Model Not Useful for Pricing Caplets

question 18

Multiple Choice

Why was Black's model not useful for pricing caplets?

• A) It was a model for equity options,not futures.
• B) It assumed that the spot rate of interest rates is constant.
• C) It only applied to floorlets,not caplets.
• D) Caplets are American options,and Black's model is for valuing European options.
• E) Both (b)and (d).

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Definitions:

Formalities

Specific procedures or requirements that must be observed in legal transactions, such as contracts or the execution of a will.

Void

A term describing a contract or legal agreement that has no legal effect and cannot be enforced by law.

Bequest

In a will, a gift of personal property or money. Also called a legacy.

Personal Property

Refers to movable assets owned by individuals or businesses, excluding real estate.