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Homework answers / question archive / Aston University - BF 3314 Which of the following is assumed by the Black-Scholes-Merton model? The return from the stock in a short period of time is lognormal

Aston University - BF 3314 Which of the following is assumed by the Black-Scholes-Merton model? The return from the stock in a short period of time is lognormal

Finance

Aston University - BF 3314

Which of the following is assumed by the Black-Scholes-Merton model?

    1. The return from the stock in a short period of time is lognormal.
    2. The stock price at a future time is lognormal.
    3. The stock price at a future time is normal.
    1. None of the above.

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Answer:

b )

Step-by-Step explanation

Black Scholes Merton model explains the variation the prices of stock over a period of time, which ultimately tells the price of European call option. This theory makes an assumption that the stock prices follow a geometric pattern and that its prices follow a continuous normal distribution. Hence, the correct option is B.

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