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:

Interest

The charge for borrowing money, usually expressed as a percentage of the amount borrowed.

Forbidden

Something that is not allowed or is prohibited.

Present Value

The assessed current worth of a future money amount or cash flow series, using an established rate of return.

Interest Rate

The cost of borrowing money, often expressed as a percentage of the amount lent.