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Homework answers / question archive / Curtin University - FINANCE INVE3000 Which of the following statements is true? The Black-Scholes-Merton model is used to price all vanilla options, because it is an exact closed form, analytical formula

Curtin University - FINANCE INVE3000 Which of the following statements is true? The Black-Scholes-Merton model is used to price all vanilla options, because it is an exact closed form, analytical formula

Finance

Curtin University - FINANCE INVE3000

Which of the following statements is true?

    1. The Black-Scholes-Merton model is used to price all vanilla options, because it is an exact closed form, analytical formula.
    2. The Black-Scholes-Merton price of a European vanilla option is an expected value of the asset.
    3. The Black-Scholes-Merton price of a European vanilla option is the expected profit from the option.
    4. The   Black-Scholes-Merton      model    allows    an   option   to   be   priced assuming the investment is risky.
    5. None of the above.

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Answer:

a ) The Black-Scholes-Merton model is used to price all vanilla options , because it is an exact closed form , analytical formula .

Step-by-Step explanation

In Finance, the Black Scholes model (Black-Scholes-Merton model) is an analytical formula, that studies the variations in the prices of financial instruments, that can be used to find the price of all the European vanilla options. Thus, out of the various statements given above, the statement given in option (A) is correct.

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