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 Apr 03, 2021

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.

Expert Solution

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.

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote