In the Black-Scholes Formula, Interest Rates Are Assumed to Be

question 6

Multiple Choice

In the Black-Scholes formula, interest rates are assumed to be constant. This is not appropriate for pricing options on bonds primarily because

• A) The value of a bond is constant if interest rates are constant.
• B) Constant rates would mean no volatility in bond prices and no option value.
• C) Payoffs would be discounted at a constant rate.
• D) None of the above.

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Definitions:

Magnesium

A lightweight, silvery-white, highly reactive metal used in alloys, fireworks, and as a reducing agent in the production of uranium and other metals.

Chlorine

A greenish-yellow, diatomic gas that is a member of the halogen group, highly reactive and used as a disinfectant and in the production of numerous chemicals.

Cobalt

Cobalt is a chemical element with the symbol Co and atomic number 27, known for its magnetic properties and use in various alloys.