Question

1. One assumption of the Black-Scholes model is that the underlying stock does not pay a dividend.

a. true

b. false

2. The B/S model cannot be used to find the value of American put options.

a. true

b. false

3. The variable with the largest affect on the B/S model is the risk-free rate.

a. true

b. false

4. In equilibrium, the call option premium calculated using the B/S model should always equal the option premium calculated using the binomial model.

a. true

b. false

Answer 1

Assumption of Black scholes model:

1. Used for valuing European call option.

2. Risk free rate is constant.

3.Stocks don't pay dividend.

4. No transaction cost.

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1. True

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2. True

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3. False

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4. False