Asked by Chasity Fields on Jul 26, 2024
Verified
All the inputs in the Black-Scholes option pricing model are directly observable except
A) the price of the underlying security.
B) the risk-free rate of interest.
C) the time to expiration.
D) the variance of returns of the underlying asset return.
Black-Scholes
It's a mathematical model used for pricing European-style options, taking into account factors like volatility, underlying asset price, and time to expiration.
Variance
A statistical measure of the dispersion of returns for a given security or market index.
- Understand the components of the Black-Scholes option pricing model and which inputs are observable or not directly observable.
Verified Answer
YL
Yolla Lisandra
Jul 29, 2024
Final Answer :
D
Explanation :
The variance of returns of the underlying asset return is not directly observable and must be estimated, making it the exception among the inputs listed for the Black-Scholes option pricing model.
Learning Objectives
- Understand the components of the Black-Scholes option pricing model and which inputs are observable or not directly observable.